NSTITUTE AND EW C Y INSURANCE FOR ORK LIEN LAW … York Lien Law and Insurance for Construction... · mechanics lien is filed? ... after the completion of the contract or the final

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NEW YORK LIEN LAW AND INSURANCE FOR

CONSTRUCTION PROJECTS: A

PRACTICAL LOOK Prepared in connection with a Continuing Legal Education course presented at New York County Lawyers’ Association, 14 Vesey Street, New York, NY

scheduled for February 26, 2015

Program Co-sponsors: NYCLA Construction Law Committee, Insurance Law

Committee and Real Estate Section

Program Chair: Ariel Weinstock, Katsy Korins LLP

Faculty: Thomas Donohue, Baldon Group, Inc. Insurance; Al Stork, Lex Terrae Ltd/Old Republic National Title Insurance Company

This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3 Transitional and Non-Transitional credit hours: 2 Professional Practice/Law Practice Management; 1 Skills.

This program has been approved by the Board of Continuing Legal education of the Supreme Court of New Jersey for 3 hours of total CLE credits. Of these, 0 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal law, workers compensation law and/or matrimonial law.

ACCREDITED PROVIDER STATUS: NYCLA’s CLE Institute is currently certified as an Accredited Provider of continuing legal education in the States of New York and New Jersey.

Information Regarding CLE Credits and Certification

New York Lien Law and Insurance for Construction Projects: A Practical Look February 26, 2015; 6:00 PM to 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time

you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

New York Lien Law and Insurance for Construction Projects: A Practical Look

Thursday, February 26, 2015 6:00 PM to 9:00 PM Program Co-sponsors: NYCLA Construction Law Committee, Insurance Law

Committee and Real Estate Section Program Chair: Ariel Weinstock, Katsy Korins LLP Faculty: Thomas Donohue, Baldon Group, Inc. Insurance;

Al Stork, Lex Terrae Ltd/Old Republic National Title Insurance Company

AGENDA

5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introductions and Announcements

6:10 PM – 9:00 PM Presentation and Discussion *** There will be two 10 minute breaks taken during the program.

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The NY Lien Law (Articles 2 and 3), Mechanic Liens,

Building Loans and Applicable Case Law

February 2015

Al StorkSenior Counsel

Old Republic National Title Insurance Company/

Lex Terrae, Ltd

Who We Are

• Over 250 offices, 4,000 employees, 8,200 agents

• Nationwide reach – all 50 states

• The fastest growing national title insurance company in the nation

• Full line of title insurance & real estate settlement services

• Emphasis on ethics & accountability

• Industry leading financial strength ratings, strong balance sheet, conservative reserving

Old Republic Title Insurance Group

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About Our Parent

• We are owned by Old Republic International

• One of the nation’s 50 largest publicly held insurance organizations

• Traded on the New York Stock Exchange, member of the Fortune 500

• 30 consecutive years of dividend growth

• Over $16 billion in assets and over $3.7 billion in shareholders’ equity

• Managed for the long run

Old Republic International

Consolidated GAAP as of 12/31/2013

Balance Sheet Comparisons

ORI Fidelity 1st Amer Stewart

Assets $16.5 $10.5 $6.5 $1.3

Reserves & Equity $13.2 $7.2 $3.5 $1.2

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

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Per ALTA statistics based on total premiums written. Market share for all years reflect the current family organization structure.

Title Industry Market Share

By Underwriting Family

5

Market Share Inc (Dec)

Yr 2008 Yr 2009 Yr 2010 Yr 2011 Yr 2012 Yr 2013 6 mo's 14 08 to 14

Fidelity 45.3% 41.6% 40.8% 37.6% 36.8% 34.6% 32.9% ‐27.4%

1st American 29.1% 27.8% 26.7% 26.8% 26.3% 26.9% 27.5% ‐5.5%

ORT 5.6% 8.1% 11.0% 13.0% 13.5% 14.9% 14.8% 164.3%

Stewart 12.6% 14.5% 13.7% 13.7% 13.0% 12.2% 12.7% 0.8%

Regionals 7.4% 8.0% 7.8% 8.9% 10.4% 11.4% 12.1% 63.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Overview

•Purpose of the lien law

•Mechanic’s liens (filing, priority, duration, how discharged)

•Building loan contracts and how to ensure priority over potential mechanic’s liens

•Applicable Case Law

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Purpose of Lien Law

•Enacted to protect those parties who were not paid forlabor performed or materials furnished in connection withthe improvement of real property

What is a mechanic’s lien ?

•Created by state statute; secures priority of payment of the price orvalue of work performed and materials furnished in erecting orrepairing a building or other structure•Attaches to the land as well as buildings and improvementserected thereon•Encumbers real property at the time a notice of lien is filed•No need for judicial approval prior to filing a mechanic’s lien•Challenges to the constitutionality of the lien law based upon aclaim of deprivation of property without due process of law havebeen rejected. (Warren’s Weed NY real property, Mechanic’s liens,Section 1.03)•May be foreclosed pursuant to the provisions of the RPAPL.(Section 43 NYS Lien Law)

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Filing a Mechanic’s Lien

•The right is afforded to a contractor, subcontractor, laborer, materialmen, landscape gardener, nurseryman or person or corporation sellingfruit or ornamental trees, roses, shrubbery, vines and small fruits whoperforms labor or who furnishes materials for the improvement of realproperty with the consent or at the request of the owner or owner’sagent, contractor or subcontractor (Section 3 of the Lien Law)

•What happens if works to the premises is ordered by a lessee and amechanics lien is filed?

•It is a question of fact as to whether the work was done with the consentor at the request of the fee owner or his agent


If the lease requires the lessee to make improvements (not as generalrequirement to keep the premises in good repair), then the lessorsconsent will be found.

Other factors to consider are:•If lessor fails to object to the improvement;•If lessor receives a benefit from the improvement;•If lessor gives a credit for improvement;•If lessor signs for authorization of plans for government authority;•If lessor expresses satisfaction with the work;•If lessor fails to attempt to stop the work;•If lessor waives a lease provision requiring his approval for the work;

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•If lessor is aware of improvements being made prior to execution offormal lease;

•If lessor submits an application to municipality to have improvementsconnected with utility services.(Warren’s Weed NY Real Property, Mechanic liens, Section 2.03)

•This analysis applies to coop unit leases also.

•Section 2 (4) of the Lien Law defines “improvements” and items forwhich a mechanic’s lien may be filed

•Lienor’s can obtain a lien by filing a notice of lien in the County Clerk’soffice in the County in which the real property is located


• Section 9: Notice of lien contents

• Section 10: Lien must be filed within 8 months (or 4 months for asingle family dwelling) after the completion of the contract or the finalperformance of the work or the furnishing of materials dating from thelast item of work performed or materials furnished. Provided furtherwhere the notice of lien is for retainage, the notice of lien may befiled within 90 days after the date the retainage was due to bereleased.

• Section 11: A Lienor must serve the owner of the premises within 5days before or within 30 days after filing a notice of lien in the countyclerk’s office

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Priority of Liens

•Section 13(1): all liens shall be on a parity (Except as set forth in Section56; and except that in all cases laborers for daily or weekly wages shallhave preference over all other claimants under this article)

•Title companies do not usually escrow for mechanic’s liens due tothis provision. If there is a lien filed at the time of a closing for say $10,000 and title company escrows for same, and a new mechanic’slien is then filed for $ 1,000,000 after the closing. The $ 1,000,000mechanic’s lien will have the same priority as the $10,000 mechanic’slien and if the title company cannot collect from the seller or owner ofthe premises the title company may be stuck with a $ 1,000,000 claimto cover the discharging of said $ 1,000,000 mechanic’s lien

•While the Lien Laws purpose is to protect parties who do work to andsupply materials to premises it also affords a way for parties purchasing orproviding funds to the owner of the premises with a way of protecting theirpurchase or mortgage from being subordinated to mechanic’s liens

Priority of Liens

•If no lien is filed at the time a deed or a mortgage is delivered (for actualconsideration) and even if there was ongoing work being done at thepremises then provided that said deed or mortgage has a section 13 lienclause to the effect:

For a deed (Section 13(5)):

AND the party of the first part, in compliance with Section 13 of the LienLaw, covenants that the party of the first part will receive theconsideration for this conveyance and will hold the right to receive suchconsideration as a trust fund to be applied first for the purpose of payingthe cost of the improvement and will apply the same first to the paymentof the cost of the improvement before using any part of the total of thesame for any other purpose.

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Priority of Liens

For a mortgage (Section 13(3)) :That the mortgagor will, in compliance with Section 13 of the Lien Law, receive theadvances secured hereby and will hold the right to receive such advances as a trustfund to be applied first for the purpose of paying the cost of improvement and willapply the same first to the payment of the cost of improvement before using any partof the total of the same for any other purpose.It is also sufficient to state: “Subject to the trust fund provisions of section 13 of thelien law.”•Then said deed or mortgage will have priority over a subsequently filed mechanic’slien•If the deed or mortgage or other type of conveyance (i.e. lease or assignment oflease) does not have a section 13 Lien clause then said instrument will be subject toa lien filed after the delivery of said conveyance provided said liens are filed within 8months (or 4 months for single family dwellings) after the final work is done on thepremises (or within 90 days after the date the retainage was due to be released).Lienors have an inchoate lien that relates back to when the work was done. (Section13 NYS Lien Law)

In Leonard Engineering, Inc. V. Zephyr Petroleum Corporation 522 NYS2d 900

In Leonard Engineering, Inc, v. Zephyr PetroleumCorporation 522 NYS2d 900 a deed was delivered prior tothe filing of a mechanic’s lien but recorded after the filing ofthe mechanic’s lien. The court held that since the deed hadsection 13 lien clause the deed had priority over themechanic’s lien. This is a second department AppellateDivision case. It could arguably also apply to mortgages thatare delivered prior to the filing of a mechanic’s lien butrecorded after the mechanic’s lien is filed.

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Monroe Sav. Bank v First Nat'l Bank (1976, 4th Dept) 50 App Div 2d 314, 377 NYS2d 827

Mortgage that contains a section 13(3) trust fund clause butgiven to secure only an antecedent debt does not havepriority over subsequently filed mechanic liens.

Duration of Mechanic’s Lien

•Section 17: a mechanic’s lien shall remain a lien on the premises for 1 year from the date it is filed in the County Clerk’s office

•Can be extended as a right for 1 year (except need court order 1-4 family)

•Can be extended for another year by court order

•Also extended if a lis pendens is filed to foreclose the lien or if the lienor is named as a defendant in an action to enforce another lien and said other lienor files a lis pendens

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Condominium Act Section 339-I of RPL

•Section 339-I of the Real Property Law prohibits the filing of a mechanic’s lien against the common elements unless there was unanimous consent of the unit owners

• A mechanic can only file a lien against the units and common elements of the unit owners who consent to the work.

Discharge of Mechanic’s Lien

•Section 19: lien can be discharged by:

•A certificate filed by the lienor stating that the lien is satisfied or released•An order of the court if the lienor neglects to prosecute the lien (section 59 of the lien law)•Filing a bond with the county clerk in an amount equal to 110% of the lien. The lien would then attach to the bond in the place of the real property. In the exhibits there are instructions provided by the NY County Clerk’s office setting forth what they need to have filed in order to discharge a mechanic’s lien by bond along with a redacted Affirmation in support of filing of lien discharge bond with accompanying exhibits. •By filing with the County Clerk a transcript of judgment with proof of service of notice of entry showing a final determination of the action in favor of the owner of the premises

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Discharge of Mechanic’s Lien

•Where it appears from the face of the notice of lien that the claimant doesnot have a valid lien the owner or other party in interest may apply to anappropriate court for an order summarily discharging of record the allegedlien.If approved an order shall be made discharging the lien of record.

•Section 20: lien can be discharged by depositing the amount of the lien plusinterest with the County Clerk:

Note: A subcontractor’s lien is limited to funds owed by the owner to thegeneral contractors at the time the lien is filed. If a general contractor has beenpaid in full then the subcontractor is not entitled to a mechanic’s lien on theowner’s property.

(Lien Law Section 4)( Robert P. Frink v. Dudley Bierau et al 212 NYS2d 869)

Miscellaneous Lien Law Sections

• Section 34: Waiver of lienNotwithstanding the provisions of any other law, any contract, agreement orunderstanding whereby the right to file or enforce any lien created underarticle two is waived, shall be void as against public policy and whollyunenforceable. This section shall not preclude a requirement for a writtenwaiver of the right to file a mechanic's lien executed and delivered by acontractor, subcontractor, material supplier or laborer simultaneously with orafter payment for the labor performed or the materials furnished has beenmade to such contractor, subcontractor, material man or laborer nor shallthis section be applicable to a written agreement to subordinate, release orsatisfy all or part of such a lien made after a notice of lien has been filed.(attached is allowable lien waiver form)

• Section 37: Allows for the filing of a bond to discharge all liens before orafter the commencement of the improvement.

• Section 39: Lien wilfully exaggerated is void• Section 39-a: Provides for liability of lienor where lien has been declared

void on account of wilful exaggeration

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Building Loan Contract - Definition

•Section 2:

The term "building loan contract," when used in this chapter, means acontract whereby a party thereto, in this chapter termed "lender," inconsideration of the express promise of an owner to make animprovement upon real property, agrees to make advances to or for theaccount of such owner to be secured by a mortgage on such realproperty, whether such advances represent moneys to be loaned orrepresent moneys to be paid in purchasing from or in selling for suchowner bonds or certificates secured by such mortgage upon such realproperty, providing, however, nothing herein contained shall be deemedto construe as a building loan contract a preliminary application for abuilding loan made by such owner and accepted by such lender if,pursuant to such application and acceptance, a building loan contract isthereafter entered into between the owner and the lender and filed asprovided in section twenty-two of this chapter.

Pending Disbursement Clause

•Since BLA provide for advances to be made over time, when title insurers insure abuilding loan mortgage the policy contains a pending disbursement clause asfollows:Pending disbursement of the full proceeds of the loan secured by the mortgagedescribed herein, this policy insures only to the extent of the amount actuallydisbursed plus interest accrued thereon, but increases as disbursements are madein good faith and without knowledge of any defects in, or objections to, the title, up tothe face amount of the policy. Title shall be continued down to the date of eachdisbursement and the Company shall furnish to the mortgagee a continuation report,stating whether since the date hereof or since the date of the last precedingcontinuation report any liens or encumbrances have been recorded, whether anytaxes, assessments, or other charges of whatever nature which have become dueand payable have been paid, whether there are survey variations, encroachments,or violations of setback and whether there are any additional title exceptions orobjections. In the event that the lien of the mortgage described herein is insured bymore than one insurer, this Company agrees that it shall be bound by thecontinuation reports of a single company specified as "lead" insurer herein.

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Building Loan Contracts - Priority

•The lender must comply with the terms of the Lien Law, file a buildingloan contract and record a building loan mortgage in compliance withSections 13 and 22 of the Lien Law

•If a lender makes a loan to an owner for improvements to be made toreal property then a building loan agreement must be filed pursuant tosection 22 of the Lien Law and a building loan mortgage must berecorded. A building loan mortgage must contain the section 13 LienLaw clause. (Under certain circumstances a building loan agreementalso needs a section 13 lien law clause; title insurers always requestthat the BLM and BLA contain said lien law clause.) (See attached formof BLA and BLM. Note that both forms contain a Lien Law Section 13trust clause.)

Filing the Building Loan Agreement

•Must be filed in the County Clerk’s office on or before the same date that the BLM gets recorded in the Register’s office

•If the BLM gets recorded prior to the date that the BLA is filed then the BLM will be subordinate to the lien of any party that files a notice of lien

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Section 22 Affidavit

The BLA must contain a Section 22 affidavit

•Filed to give parties who do work or supply materials to the premisesnotice as to how much money is available from the BL lender for theparticular project

•Sets forth: •the consideration paid or to be paid for the loan•all other expenses, if any incurred•the net sum available to borrower for the improvement


•The amounts that the lender and borrower can deduct from said loan must fit into the definition of “Costof Improvement” as set forth in Section 2 (5) of the Lien Law• Permissible deductions for the Section 22 affidavit include:

1. Title charges for BLM2. Interest on building loan during construction3. Mortgage tax for BLM4. Recording fees for BLM5. Taxes, assessments, water and sewer rents paid or to be paid for periods prior to or during construction6. Bank inspection and appraisal charges7. Insurance premiums during construction8. Reasonable mortgage broker commissions and lender's attorney's fees for BLM9. Sums paid to take by assignment prior existing mortgages which are consolidated with the building loan

mortgage or to discharge the mortgages or in reduction thereof and accrued interest thereon10.Architects, engineers or surveyors fees11.Premiums on bonds or bonds filed to discharge liens12.Reimbursement to the owner of payments for above expenses made prior to the date of the initial advance on

building loan, and for cost of improvement expenses such as payroll taxes and labor and materials.

• Non-permissible expenses:1. Land acquisition costs2. “soft costs", e.g. advertising, managing agents, brochures3. Non-reasonable expenses

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•If there is a material misrepresentation in the Section 22 affidavit thenthe entire BLM will be subordinated to a notice of lien filed by amechanic’s lienor. ( Nanuet Nat’l Bank v. Eckerson Terrace, Inc. 417N.Y.S.2d 901)

•Detrimental reliance by a potential mechanic lienor is not required.(HNC Realty Co. v. Golan Heights Developers, 360 N.Y.S.2d 954)

•The Lien Law can be harsh and the courts interpret it harshly solenders and their attorneys are well advised to follow themandates of said statute strictly

Modification of a Building Loan Agreement

•If a lender and borrower modify a BLA then the modification must befiled within 10 days of it’s earliest execution or the lender’s BLM will besubordinated to later filed mechanic liens

•Section 22: a modification of a BLA shall not affect or impair the rightsor interest of a person who previous to the filing of such modificationhad furnished materials or had performed or contracted to performlabor for the improvement of real property but such right or interestshould be determined by the original contract

•To insure the modification of a BLA, title companies require that saidmodification be consented to by all parties who have suppliedmaterials, work, labor, and or services prior to the filing of saidmodification agreement

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Material Modifications to Building Loan Agreements

•Not all modifications of BLA are considered to be material but a modification is material if it:

•Alters the rights and liabilities otherwise existing between the parties to the agreement; or

•Enlarges, restricts, or impairs the rights of any third party beneficiary to the agreement (i.e. a mechanic’s lienor)

(Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S.2d 882; HNC Realty Company v. Bay View Tower Apartments Inc.)

Examples of Material Modifications

Change of the central terms of the BLA, such as amount or manner of payment

•Modification of BLA which deals with consideration paid for loan expenses incurred, or net sum available

•Substitution of a faithful performance accounting bond for a surety payment bond

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If the premises are sold during the life of a BLA:•A tri-partite agreement by the seller-assignor, mortgagor - assignee -purchaser, and the mortgagee•The purchaser must assume all of the terms, covenants, and conditions under the agreement and agree to hold the advances to be made under Section 13 of the Lien Law•The mortgagee must consent to the assignment of the building loan agreement•The agreement must be filed within ten (10) days from the earliest execution date and consented to by all persons who have supplied work, labor, and services prior to the filing of the within agreement


If the loan is assigned during the life of a BLA:

•The owner, old lender and new lender must enter into a tri-partiteagreement•The new lender must assume the obligations of the BLA•The agreement must be filed within ten (10) days from the earliestexecution date and consented to by all persons who have suppliedwork, labor, and services prior to the filing of the within agreement(But see International Exterior Fabrications, LLC v. J. PetrocelliContracting, Inc. et al. 2011 N.Y. Misc. LEXIS 2777; 2011 NY Slipop 315454)

Lienor’s knowledge of a material modification does not relieve parties tothe BLA of the obligation to file a modification of the BLA in compliancewith Section 22 of the Lien Law. (Security National Bank v. Village Mallat Hillcrest, 382 N.Y.S.2d 882)

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Non-material modifications

• Mere extension of the BLA

• Mere extension of the completion date of the project. (The New YorkSavings Bank v. Wendell Apartments, Inc., 245 N.Y. S.2d 827)

• Waiver of the right to hold borrower in default even though thebuilding loan contract would allow the lender to do so (HowardSavings Bank v. Lefcon Partnership 618 N.Y.S 2d 910 )

• Arguably when there is an assignment of the BLA and BLM to a newlender who adds more money and files an amended and restatedBLA and then records an amended and restated BLM. (InternationalExterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. etal. 2011N.Y. Misc. LEXIS 277;)

Project Loan Agreement

•If the borrower needs to borrow money for non-permissible BL costs (costs that are not within the definition of improvement as set forth in Section 2 (4) of the Lien Law) the lender will usually lend said sums pursuant to a separate project loan agreement and project loan mortgage•Typically a PLA is not filed in the county clerk’s office as is a BLA

•However: Lehman Brothers Holding, Inc. v. 25 Broad, LLC 2011 NY slip op319314; 2011 NY Misc. Lexis 3543). Construed a Project Loan Agreement to be a Building Loan Contract and since it was not filed in the County Clerks office pursuant to Section 22 of the Lien Law the project loan mortgage was subordinated to the mechanic’s liens•PLAs should be drafted in a way that they cannot be construed to be a BLA•Consideration should be given to including a clause in the PLA to the effect that no portion of the proceeds for the PL are being used for the improvement of the premises.

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Bifurcated Loan Agreements and mortgages –Divided Case Law resolved by The Court of Appeals (2013)

•Some lenders draw up very sophisticated papers which should arguably not cause the lender to lose priority to subsequently filed mechanic liens•In some cases, lenders provide for BLAs that refer to acquisition costs, BL costs and PL costs

•Supportive case law: (Yankee Bank For Finance & Savings, FSB v. Task Associates etal. 731 F. Supp. 64)•Case law which was not supportive: ( Atlantic Bank of New York v. Forrest House Holding Company et al. 651 N.Y.S.2d 607) •Court of Appeals Case: (Altshaler Shaham Provident Funds, Ltd. v. GML Tower, LLC 21 N.Y. 3d 352)

•Lenders should do their best to strictly comply with the terms of the Lien Law so that they are in a position (in a foreclosure scenario) to obtain a summary judgment in their favor allowing them to foreclose their BLMs PLMs or Acquisition mortgages over any mechanic liens•Not Recommended: Bifurcated or trifurcated loan documents. (Despite 2013 Court of Appeals decision)

Recommended Priority of Mortgages

1. Acquisition Mortgage;2. Building Loan Mortgage;3. Project Loan Mortgage;

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Escrow Mortgages (Secured)

•After the money is lent, the lenders require the borrower to put part ofthe money into an escrow account and provide that said funds be usedto make repairs or improvements to the premises

•We do not recommend this type of an arrangement. If money is beinglent from a lender to a borrower in order to have premises improvedthen a building loan agreement should be filed and section 22 of theLien Law should be complied with

Escrow MortgagesCase Law Example

Lehman Brothers Holdings Inc v. Genwood Strathallar LLC 2011 NY Misc. Lexis 6154 •Since the loan constituted a building loan agreement under the lien law and since a building loan agreement was not filed in compliance with section 22 of the lien law the mechanic’s lienors had priority over the mortgage•The foreclosing mortgagee asserted that the Consolidated Note, the Loan Agreement and the mortgage did not contain the borrower’s express promise to make an improvement at the property, which is an element of a building loan contract•The Court ruled that the Loan Agreement and the two Repair Escrow Agreements “must be read together for purposes of determining whether this is a building loan contract”•The mortgagee asserted that the loan was not a building loan because funds were disbursed at one time and not as advances over time•The court determined that “the money was not made available to the borrowers in a lump sum, the funds could not be used for any other purpose than for repairs, and could only be disbursed by permission of the lender upon request of the borrower as the work was completed”

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Notices of Lending – Case Law

• Many lenders are now filing Notices of Lending pursuant to Section 73 of the Lien Law along with their BLAs

• Why: Court of Appeals decision in Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A.

• Title companies do not require the filing of the notice of lending since the mechanic lienor claims under Article 3A of the Lien Law are not within the coverage of the title policy

National Mechanic’s Liens Types

There a 3 basic state statutory schemes nationally:

•Where the lien priority is established when the labor or materials areprovided, so long as a mechanic’s lien is filed. The lien priority relatesback to when the work or materials were furnished. NY falls within thisscheme

•Where the priority of the lien is established by the filing of the lien or bya notice of commencement

•Where priority is established by the initiation of judicial action

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Old Republic / Lex Terrae

For all title-related inquiries:

Al Stork

[email protected]

212-599-1300 (Office)

212-551-2224 (Direct)

Lien Law Exhibits

Exhibits

Exhibit A: NYCLS Lien § 43

Exhibit B: NYCLS Lien § 3

Exhibit C: NYCLS Lien § 2

Exhibit D: NYCLS Lien § 9

Exhibit E: NYCLS Lien § 10

Exhibit F: NYCLS Lien § 11

Exhibit G: NYCLS Lien § 13

Exhibit H: Leonard Engineering, Inc. v. Zephhyr Petroleum Corporation 522 N.Y.S. 2d900

Exhibit I:Monroe Saving Bank v. First Nat’l Bank 50 App. Div. 2d 314, 377 NYS2d 827

Exhibit J: NYCLS Lien § 17

Exhibit K: NYCLS Real P § 339 -I

Exhibit L: NYCLS Lien § 19

Exhibit M:NYCLS Lien § 59

Exhibit N:NYCLS Lien § 20

Exhibit O: NYCLS Lien § 4

Exhibit P: Robert P. Frink v. Dudley Bierau et al 212 N.Y.S. 2d 869

Exhibit Q: County Clerk's instruction (Bond)

Exhibit R: Affirmation for bond-discharge (NY County)

Exhibit S: NYCLS Lien § 34

Exhibit T:Form Waiver

Exhibit U: NYCLS Lien § 37

Exhibit V: NYCLS Lien § 39

Exhibit W: NYCLS Lien § 39a

Exhibit X: NYCLS Lien § 22

Exhibit Y: Title Company Checklists

Exhibit Z: Building Loan Agreement

Exhibit AA: Building Loan Mortgage

Exhibit BB: Form Section 22 Affidavit

Exhibit CC: Nanuet Nat'l Bank v. Eckerson Terrace, Inc.417 N.Y.S. 2d 901

Lien Law Exhibits

Exhibit DD: HNC Realty Co.v. Golan Heights Developers, 360 N.Y.S 2d 954

Exhibit EE: Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S. 2d 882

Exhibit FF: HNC Realty Company v. Bay View Tower Apartments Inc. 64 A.D.2d 417;409 N.Y.S.2d 774

Exhibit GG: International Exterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. etal. 2011 N.Y. Misc. Lexis 2777

Exhibits HH: The New York Savings Bank v. Wendell Apartments, Inc., 245 N.Y.S. 2d827

Exhibit II: Howard Savings Bank v. Lefcon Partnership 618 N.Y.S. 2d 910

Exhibit JJ: Lehman Brothers Holding, Inc. V. 25 Broad, LLC 2011 NY slip op319314;2011 NY Misc. Lexis 3543

Exhibit KK: Yankee Bank for Finance and Savings, FSB v. Task Associates et al. 731F. Supp. 64

Exhibit LL: Atlantic Bank of New York v. Forrest House Holding Company et al. 651N.Y.S. 2d 607

Exhibit MM: Altshuler Shaham Provident Fund, Ltd v. GML Tower LLC 21 N.Y. 3D 352

Exhibit NN: Lehman Brothers Holdings Inc v. Genwood Strathaller LLC 2011 NY Misc.Lexis 6154

Exhibit OO: Aspro Mechanical Contracting, Inc. v. Fleetbank, N.A. 1 N.Y. 3d 324; 773N.Y.S. 2d 735

Exhibit PP : NYCLS Lien § 73

Exhibit QQ: Notice of Lending Form

Exhibit RR: Title Loan Policy Form

Exhibit A: NYCLS Lien § 43

Exhibit B: NYCLS Lien § 3

Exhibit C: NYCLS Lien § 2

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*** This section is current through 2014 released chapters 1-25, 50-59 ***

LIEN LAWARTICLE 1. SHORT TITLE; DEFINITIONS

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NY CLS Lien § 2 (2014)

§ 2. Definitions

1. Lienor. The term "lienor," when used in this chapter, means any person having a lien upon property by virtue of itsprovisions, and includes his successor in interest.

2. Real property. The term "real property," when used in this chapter, includes real estate, lands, tenements andhereditaments, corporeal and incorporeal, fixtures, and all bridges and trestle work, and structures connected therewith,erected for the use of railroads, and all oil or gas wells and structures and fixtures connected therewith, and any lease ofoil lands or other right to operate for the production of oil or gas upon such lands, and the right of franchise granted by apublic corporation for the use of the streets or public places thereof, and all structures placed thereon for the use of suchright or franchise.

3. Owner. The term "owner," when used in this chapter, includes the owner in fee of real property, or of a less estatetherein, a lessee for a term of years, a vendee in possession under a contract for the purchase of such real property, andall persons having any right, title or interest in such real property, which may be sold under an execution in pursuanceof the provisions of statutes relating to the enforcement of liens of judgment, and all persons having any right orfranchise granted by a public corporation to use the streets and public places thereof, and any right, title or interest inand to such franchise. The purchaser of real property at a statutory or judicial sale shall be deemed the owner thereoffrom the time of such sale. If the purchaser at such sale fails to complete the purchase, pursuant to the terms of the sale,all liens created by his consent after such sale shall be a lien on any deposit made by him and not on the real propertysold.

4. Improvement. The term "improvement," when used in this chapter, includes the demolition, erection, alteration orrepair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon suchproperty or materials furnished for its permanent improvement, and shall also include any work done or materialsfurnished in equipping any such structure with any chandeliers, brackets or other fixtures or apparatus for supplying gasor electric light and shall also include the drawing by any architect or engineer or surveyor, of any plans or

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specifications or survey, which are prepared for or used in connection with such improvement and shall also include thevalue of materials actually manufactured for but not delivered to the real property, and shall also include the reasonablerental value for the period of actual use of machinery, tools and equipment and the value of compressed gases furnishedfor welding or cutting in connection with the demolition, erection, alteration or repair of any real property, and the valueof fuel and lubricants consumed by machinery operating on the improvement, or by motor vehicles owned, operated orcontrolled by the owner, or a contractor or subcontractor while engaged exclusively in the transportation of materials toor from the improvement for the purposes thereof and shall also include the performance of real estate brokerageservices in obtaining a lessee for a term of more than three years of all or any part of real property to be used for otherthan residential purposes pursuant to a written contract of brokerage employment or compensation.

5. Cost of improvement. The term "cost of improvement," when used in this chapter, means expenditures incurred bythe owner in paying the claims of a contractor, an architect, engineer or surveyor, a subcontractor, laborer andmaterialman, arising out of the improvement, and in paying the amount of taxes based on payrolls including suchpersons and withheld or required to be withheld and taxes based on the purchase price or value of materials orequipment required to be installed or furnished in connection with the performance of the improvement, payment oftaxes and unemployment insurance and other contributions due by reason of the employment out of which any suchclaim arose, and payment of any benefits or wage supplements or the amounts necessary to provide such benefits orfurnish such supplements, to the extent that the owner, as employer, is obligated to pay or provide such benefits orfurnish such supplements by any agreement to which he is a party, and shall also include fair and reasonable sums paidfor obtaining building loan and subsequent financing, premiums on bond or bonds filed pursuant to section thirty-sevenof this chapter or required by any such building loan contract or by any lease to be mortgaged pursuant thereto, orrequired by any mortgage to be subordinated to the building loan mortgage, premiums on bond or bonds filed todischarge liens, sums paid to take by assignment prior existing mortgages, which are consolidated with building loanmortgages and also the interest charges on such mortgages, sums paid to discharge or reduce the indebtedness undermortgages and accrued interest thereon and other encumbrances upon real estate existing prior to the time when the lienprovided for in this chapter may attach, sums paid to discharge building loan mortgages whenever recorded, taxes,assessments and water rents existing prior to the commencement of the improvement, and also those accruing during themaking of the improvement, and interest on building loan mortgages, ground rent and premiums on insurance likewiseaccruing during the making of the improvement. The application of the proceeds of any building loan mortgage or othermortgage to reimburse the owner for any payments made for any of the above mentioned items for said improvementprior to the date of the initial advance received under the building loan mortgage or other mortgage shall be deemed tobe an expenditure within the "cost of improvement" as above defined; provided, however, such payments are itemizedin the building loan contract and/or other mortgage other than a building loan mortgage, and provided further, that thepayments have been made subsequent to the commencement of the improvement.

5-a. Benefits and wage supplements. The term "benefits and wage supplements" as used in this chapter means allremuneration for employment paid in any medium other than cash, or reimbursement for expenses, or any paymentswhich are not "wages" within the meaning of the law, including, but not limited to, health, welfare, non-occupationaldisability, retirement, vacation benefits, holiday pay and life insurance.

6. Public corporation. The term "public corporation," when used in this chapter, means a municipal corporation or adistrict corporation or a public benefit corporation as such corporations are defined in section three of the generalcorporation law.

7. Public improvement. The term "public improvement," when used in this chapter, means an improvement of any realproperty belonging to the state or a public corporation; however, if the beneficial interest of an improvement is in anentity other than the state or a public corporation notwithstanding legal title being vested in an industrial developmentagency created under article eighteen-A of the general municipal law, then such improvement shall be considered animprovement of real property subject to mechanics' liens on real property as provided in section three of this chapter.Nothing contained in this section shall create or be deemed to create any liability upon any industrial development

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agency for the payment of the cost of any improvement, or otherwise. For the purposes of this subdivision the term"beneficial interest" shall mean the beneficial incidents of ownership of the improvement to include, but not be limitedto, the right to possession, the right to claim tax benefits, if any, and the right to purchase or secure title to theimprovement pursuant to an executory contract of sale, option agreement or lease.

8. Improvement of real property. The term "improvement of real property," when used in this chapter, means anyimprovement of real property not belonging to the state or a public corporation.

9. Contractor. The term "contractor," when used in this chapter, means a person who enters into a contract with theowner of real property for the improvement thereof, or with the state or a public corporation for a public improvement.

10. Subcontractor. The term "subcontractor" when used in this chapter, means a person who enters into a contract with acontractor and/or with a subcontractor for the improvement of such real property or such public improvement or with aperson who has contracted with or through such contractor for the performance of his contract or any part thereof.

11. Laborer. The term "laborer," when used in this chapter, means any person who performs labor or services upon suchimprovement.

12. Materialman. The term "materialman" when used in this chapter, means any person who furnishes material or theuse of machinery, tools, or equipment, or compressed gases for welding or cutting, or fuel or lubricants for the operationof machinery or motor vehicles, either to an owner, contractor or subcontractor, for, or in the prosecution of suchimprovement.

The expression "furnishes material" or other similar expression wherever used in this chapter, shall be deemed to meanand include the reasonable rental value for the period of actual use of machinery, tools or equipment, and the value ofcompressed gases furnished for welding or cutting, and the value of fuel and lubricants consumed by machineryoperating on, [n1] [n1] or by motor vehicles owned, operated or controlled by the owner, or a contractor orsubcontractor while engaged exclusively in the transportation of materials to or from the improvement for the purposesthereof.

13. Building loan contract. The term "building loan contract," when used in this chapter, means a contract whereby aparty thereto, in this chapter termed "lender," in consideration of the express promise of an owner to make animprovement upon real property, agrees to make advances to or for the account of such owner to be secured by amortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid inpurchasing from or in selling for such owner bonds or certificates secured by such mortgage upon such real property,providing, however, nothing herein contained shall be deemed to construe as a building loan contract a preliminaryapplication for a building loan made by such owner and accepted by such lender if, pursuant to such application andacceptance, a building loan contract is thereafter entered into between the owner and the lender and filed as provided insection twenty-two of this chapter.

14. Building loan mortgage. The term "building loan mortgage," when used in this chapter, means a mortgage madepursuant to a building loan contract and includes an agreement wherein and whereby a building loan mortgage isconsolidated with existing mortgages so as to constitute one lien upon the mortgaged property.

15. Subsequent financing. By the term "subsequent financing" is meant moneys borrowed upon the security of theimprovement after the recording of a building loan contract and/or mortgage other than a building loan mortgage uponthe premises to be improved and within four months after the completion thereof.

16. Prior mortgage. By the term "prior mortgage" is meant a mortgage on real property and/or leasehold recorded priorto the commencement of an improvement thereon.


17. Consideration. The term "consideration" when used in this chapter, includes real property as defined in section twohereof, and personal property as defined in section thirty-nine of the general construction law.

18. Advances. The term "advances" when used in this chapter, includes money, real property as defined in section twohereof and/or personal property as defined in section thirty-nine of the general construction law.

19. Funds. The term "funds" when used in this chapter, includes money, real property as defined in section two hereofand/or personal property as defined in section thirty-nine of the general construction law.

20. Persons. The term "persons" when used in this chapter, includes an individual, partnership, association, trust orcorporation.

HISTORY:Add, L 1909, ch 38; amd, L 1914, ch 506, § 1, L 1916, ch 507, § 1, L 1929, ch 515, § 1, L 1930, ch 859, §§ 1-3, L

1932, ch 627, §§ 1, 2, L 1934, ch 608, § 1, L 1934, ch 698, § 1, L 1937, ch 535, §§ 1, 2, L 1944, ch 363, § 1, eff March29, 1944.

Sub 4, amd, L 1947, ch 525, § 1, L 1947, ch 878, § 1, L 1982, ch 925, § 1, eff March 20, 1983.Sub 5, amd, L 1959, ch 696, § 4, L 1961, ch 764, § 1, eff Sept 1, 1961.Sub 5-a, add, L 1959, ch 696, § 3, eff Sept 1, 1959.Sub 7, amd, L 1992, ch 662, § 1, eff Aug 30, 1992 (see 1992 note below).Sub 12, amd, L 1947, ch 525, § 1, eff April 1, 1947.

NOTES:

Editor's Notes

Laws 1992, ch 662, § 2, eff Aug 30, 1992, provides as follows:§ 2. This act shall take effect on the thirtieth day after it shall have become a law and shall not apply to improvements

commenced before such date or to improvements for which an industrial development agency has committed to financethrough the issuance of its bonds or the passage of its inducement or bond resolution before such effective date.

Revision Notes[1959 ch 696] The amendment of subdivision 5 of § 2 enlarged the class of beneficiaries of a trust of which an owner

of an improvement of real property is a trustee under provisions of the Lien Law transferred by this act to Article 3-A ofthe Lien Law. With respect to benefits and wage supplements see new subdivision 5-a of § 2, added by § 3 of this actand see Labor Law, § 220(5)(b) and Penal Law, § 962-a.

Subdivision 5-a is new. See Labor Law, § 220(5)(b) and Penal Law, § 962-a. See also the amendment of subdivision 5of § 2 of the Lien Law by § 4 of this act and subdivision 2(d) of new § 71 of the Lien Law added by this act.

New York References:This section referred to in § 13; CLS Real P § 281; CLS Tax §§ 10, 253-b, 1132Liens under contracts for public improvements, § 5Preference over contractors, § 56Personal property defined generally, CLS Gen Const § 39


Exhibit D: NYCLS Lien § 9

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LIEN LAWARTICLE 2. MECHANICS' LIENS



§ 9. Contents of notice of lien

The notice of lien shall state:

1. The name and residence of the lienor; and if the lienor is a partnership or a corporation, the business address ofsuch firm, or corporation, the names of partners and principal place of business, and if a foreign corporation, itsprincipal place of business within the state.

1-a. The name and address of the lienor's attorney, if any.

2. The name of the owner of the real property against whose interest therein a lien is claimed, and the interest of theowner as far as known to the lienor.

3. The name of the person by whom the lienor was employed, or to whom he furnished or is to furnish materials;or, if the lienor is a contractor or subcontractor, the person with whom the contract was made.

4. The labor performed or materials furnished and the agreed price or value thereof, or materials actuallymanufactured for but not delivered to the real property and the agreed price or value thereof.

5. The amount unpaid to the lienor for such labor or materials.

6. The time when the first and last items of work were performed and materials were furnished.

7. The property subject to the lien, with a description thereof sufficient for identification; and if in a city or village,its location by street and number, if known. A failure to state the name of the true owner or contractor, or amisdescription of the true owner, shall not affect the validity of the lien. The notice must be verified by the lienor or hisagent, to the effect that the statements therein contained are true to his knowledge except as to the matters therein statedto be alleged on information and belief, and that as to those matters he believes it to be true.

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Exhibit E: NYCLS Lien § 10

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NY CLS Lien § 10 (2014)

§ 10. Filing of notice of lien

1. Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or,within eight months after the completion of the contract, or the final performance of the work, or the final furnishing ofthe materials, dating from the last item of work performed or materials furnished; provided, however, that where theimprovement is related to real property improved or to be improved with a single family dwelling, the notice of lienmay be filed at any time during the progress of the work and the furnishing of the materials, or, within four months afterthe completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating fromthe last item of work performed or materials furnished; and provided further where the notice of lien is for retainage,the notice of lien may be filed within ninety days after the date the retainage was due to be released; except that in thecase of a lien by a real estate broker, the notice of lien may be filed only after the performance of the brokerage servicesand execution of lease by both lessor and lessee and only if a copy of the alleged written agreement of employment orcompensation is annexed to the notice of lien, provided that where the payment pursuant to the written agreement ofemployment or compensation is to be made in installments, then a notice of lien may be filed within eight months afterthe final payment is due, but in no event later than a date five years after the first payment was made. For purposes ofthis section, the term "single family dwelling" shall not include a dwelling unit which is a part of a subdivision that hasbeen filed with a municipality in which the subdivision is located when at the time the lien is filed, such property in thesubdivision is owned by the developer for purposes other than his personal residence. For purposes of this section,"developer" shall mean and include any private individual, partnership, trust or corporation which improves two ormore parcels of real property with single family dwellings pursuant to a common scheme or plan. The notice of lienmust be filed in the clerk's office of the county where the property is situated. If such property is situated in two or morecounties, the notice of lien shall be filed in the office of the clerk of each of such counties. The county clerk of eachcounty shall provide and keep a book to be called the "lien docket," which shall be suitably ruled in columns headed"owners," "lienors," "lienor's attorney," "property," "amount," "time of filing," "proceedings had," in each of which heshall enter the particulars of the notice, properly belonging therein. The date, hour and minute of the filing of eachnotice of lien shall be entered in the proper column. Except where the county clerk maintains a block index, the namesof the owners shall be arranged in such book in alphabetical order. The validity of the lien and the right to file a notice

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thereof shall not be affected by the death of the owner before notice of the lien is filed.

2. Where the county clerk indexes liens in a block index, every notice of lien presented to the clerk of a county of filing,in order to entitle the same to be filed, shall contain in the body thereof, or shall have endorsed thereon, a designation ofthe number of every block, on the land map of the county, which is affected by the notice of lien. The county clerk shallcause such notice of lien to be entered in the block index suitably ruled to contain the columns listed in the precedingparagraph, under the block number of every block so designated. In cases where a notice of lien shall have been filedwithout such designation or with an erroneous designation, the county clerk, on presentation of proper proof thereof,shall enter such instrument in the proper index, under the proper block number of every block in which the land affectedis situated, and shall, at the same time, make a note of such entry and of the date thereof in every place in which suchinstrument may have been erroneously indexed, opposite the entry thereof, and also upon the instrument itself, if thesame be in his possession or produced to him for the purpose, and the filing of such instrument shall be constructivenotice as to property in the block not duly designated at the time of such filing only from the time when the same shallbe properly indexed.

A county clerk may adopt a new indexing system utilizing electro-mechanical, electronic or any other method he deemssuitable for maintaining the indexes.

HISTORY:Add, L 1909, ch 38; amd, L 1916, ch 507, § 5, L 1929, ch 515, § 2, L 1956, ch 793, § 3, L 1966, ch 42, § 2, L 1982,

ch 477, § 1, L 1982, ch 925, § 2, eff March 20, 1983, L 1988, ch 335, § 1 L 1991, ch 648, § 6, eff July 26, 1991, L 1994,ch 360, § 1, L 2000, ch 288, § 1, eff Oct 22, 2000, L 2011, ch 367, § 1, eff Aug 3, 2011.

NOTES:

Practice Insights:

INHERENT DIFFICULTY OF KNOWING WHEN AND HOW OFTEN TO FILE NOTICE OF MECH-ANICS' LIEN

By Brook Boyd, Esq., New York, NY

General Editor, Alfred C. Tartaglia, Esq., New York, NY

INSIGHTA mechanics' lien will not be valid unless it complies with the technical requirements in the Lien Law, but owners willgenerally wait to attack a notice of lien until after the filing deadline has passed, when it is too late for the contractor tore-file a corrected notice of lien. Moreover, a mechanics' lien filed against an entire condominium, its commonelements, or both, is also generally void, even if the contractor has been properly hired by the condominium association.However, generally a contractor cannot waive its right to file a mechanics' lien in advance of performing its work, andso the current practice is for contractors to give only partial waivers, usually on a monthly basis, covering the workactually performed to the extent paid. Finally, a contractor has a difficult choice in deciding when to file a mechanics'lien, since the contractor naturally tends to wait until its work is complete to file a lien, but this delay may prejudice itsrights

ANALYSIS

Procedure for filing notice of mechanics' lien not difficult.


Exhibit F: NYCLS Lien § 11

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NY CLS Lien § 11 (2014)

§ 11. Service of copy of notice of lien

Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice uponthe owner, if a natural person, (a) by delivering the same to him personally, or if the owner cannot be found, to his agentor attorney, or (b) by leaving it at his last known place of residence in the city or town in which the real property orsome part thereof is situated, with a person of suitable age and discretion, or (c) by registered or certified mail addressedto his last known place of residence, or (d) if such owner has no such residence in such city or town, or cannot be found,and he has no agent or attorney, by affixing a copy thereof conspicuously on such property, between the hours of nineo'clock in the forenoon and four o'clock in the afternoon; if the owner be a corporation, said service shall be made (i) bydelivering such copy to and leaving the same with the president, vice-president, secretary or clerk to the corporation, thecashier, treasurer or a director or managing agent thereof, personally, within the state, or (ii) if such officer cannot befound within the state by affixing a copy thereof conspicuously on such property between the hours of nine o'clock inthe forenoon and four o'clock in the afternoon, or (iii) by registered or certified mail addressed to its last known place ofbusiness. Failure to file proof of such a service with the county clerk within thirty-five days after the notice of lien isfiled shall terminate the notice as a lien. Until service of the notice has been made, as above provided, an owner,without knowledge of the lien, shall be protected in any payment made in good faith to any contractor or other personclaiming a lien.

HISTORY:Add, L 1909, ch 38; amd, L 1913, ch 88, § 1, L 1929, ch 515, § 2, L 1982, ch 7, § 1, L 1988, ch 105, § 1, L 1991, ch

276, § 1, L 1996, ch 147, § 1, eff July 11, 1996 (see 1996 note below).

NOTES:

Editor's Notes

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Exhibit G: NYCLS Lien § 13

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NY CLS Lien § 13 (2014)

§ 13. Priority of liens

(1) A lien for materials furnished or labor performed in the improvement of real property shall have priority over aconveyance, mortgage, judgment or other claim against such property not recorded, docketed or filed at the time of thefiling of the notice of such lien, except as hereinafter in this chapter provided; over advances made upon any mortgageor other encumbrance thereon after such filing, except as hereinafter in this article provided; and over the claim of acreditor who has not furnished materials or performed labor upon such property, if such property has been assigned bythe owner by a general assignment for the benefit of creditors, within thirty days before the filing of either of suchnotices; and also over an attachment hereafter issued or a money judgment hereafter recovered upon a claim, which, inwhole or in part, was not for materials furnished, labor performed or moneys advanced for the improvement of such realproperty; and over any claim or lien acquired in any proceedings upon such judgment. Such liens shall also havepriority over advances made upon a contract by an owner for an improvement of real property which contains an optionto the contractor, his successor or assigns to purchase the property, if such advances were made after the time when thelabor began or the first item of material was furnished, as stated in the notice of lien. If several buildings aredemolished, erected, altered or repaired, or several pieces or parcels of real property are improved, under one contract,and there are conflicting liens thereon, each lienor shall have priority upon the particular part of the real property orupon the particular building or premises where his labor is performed or his materials are used. Persons shall have nopriority on account of the time of filing their respective notices of liens, but all liens shall be on a parity except ashereinafter in section fifty-six of this chapter provided; and except that in all cases laborers for daily or weekly wagesshall have preference over all other claimants under this article.

(1-a) Parties having assignments of moneys due or to become due under a contract for the improvement of real property,unless such assignments be set aside as diversions of trust assets as provided in article three-a of this chapter, shall havepriority as follows:

An assignee of moneys or any part thereof, due or to become due under a contract for the improvement of realproperty, whose assignment is duly filed prior to the filing of a notice of lien or assignment of every other party to the

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action, shall have priority over those parties to the extent of moneys advanced upon such assignment before the filing ofthe notice of lien or assignment next subsequent to his assignment, but as to moneys advanced subsequent to a notice oflien or assignment filed and unsatisfied or not discharged such assignee for the purpose of determining his proportionateshare of moneys available for distribution as provided in subdivision one of this section shall be treated as a lienorhaving a lien to the extent of moneys so advanced.

An assignee of moneys or any part thereof, due or to become due under a contract for an improvement of realproperty whose assignment is duly filed subsequent to the filing of the notice of lien or assignment of any other partyshall for the purpose of determining his proportionate share of moneys available for distribution, as provided insubdivision one of this section be treated as a lienor having a lien to the extent of moneys actually advanced upon suchassignment prior to the filing thereof.

(2) When a building loan mortgage is delivered and recorded a lien shall have priority over advances made on thebuilding loan mortgage after the filing of the notice of lien; but such building loan mortgage, whenever recorded, to theextent of advances made before the filing of such notice of lien, shall have priority over the lien, provided it or thebuilding loan contract contains the covenant required by subdivision three hereof, and provided the building loancontract is filed as required by section twenty-two of this chapter. Every mortgage recorded subsequent to thecommencement of the improvement and before the expiration of the period specified in section ten of this chapter forfiling of notice of lien after the completion of the improvement shall, to the extent of advances made before the filing ofa notice of lien, have priority over liens thereafter filed if it contains the covenant required by subdivision three hereof.The lien of a vendee under an executory contract for the sale of land and the improvement thereof by the construction ofa building thereon shall, to the extent of amounts paid thereunder to the vendor before the filing of a notice of lien, havepriority over liens filed after the contract or memorandum thereof is recorded as provided in section two hundredninety-four of the real property law if the recorded contract or memorandum specifies the total amount of paymentsmade by the vendee or required by the contract to be made by the vendee before conveyance of title.

(3) Every such building loan mortgage and every mortgage recorded subsequent to the commencement of theimprovement and before the expiration of the period specified in section ten of this chapter for filing of notice of lienafter the completion of the improvement shall contain a covenant by the mortgagor that he will receive the advancessecured thereby and will hold the right to receive such advances as a trust fund to be applied first for the purpose ofpaying the cost of improvement, and that he will apply the same first to the payment of the cost of improvement beforeusing any part of the total of the same for any other purpose, provided, however, that if the party executing the buildingloan contract is not the owner of the fee but is the party to whom such advances are to be made, a building loan contractexecuted and filed pursuant to section twenty-two of this chapter shall contain the said covenant by such party executingsuch building loan contract, in place of the covenant by the mortgagor in the building loan mortgage as hereinbeforeprovided. Nothing in this subdivision shall be considered as imposing upon the lender any obligation to see to theproper application of such advances by the owner; and nothing in this section, nor in that portion of section two of thischapter, defining "cost of improvement" shall be deemed to impair or subordinate the lien of any mortgage containingthe covenant required by this subdivision. To the extent that the trust res consists of the right to receive advances asdistinct from advances actually received, breach of the trust shall give rise to a civil action only. The covenant providedfor herein shall be deemed to have been made and to be in full force and effect if, in lieu of the foregoing provisions, astatement in substantially the following form is contained in the mortgage or contract, "subject to the trust fundprovisions of section thirteen of the lien law."

(4) Nothing in subdivision two or three of this section shall apply to any mortgage given by a purchaser for value froman owner making the improvement and recorded prior to the filing of a lien pursuant to this chapter, provided theinstrument of conveyance contains the provisions mentioned in subdivision five herein.

(5) No instrument of conveyance recorded subsequent to the commencement of the improvement, and before theexpiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the


improvement, shall be valid as against liens filed within a corresponding period of time measured from the recording ofsuch conveyance, unless the instrument contains a covenant by the grantor that he will receive the consideration forsuch conveyance and will hold the right to receive such consideration as a trust fund to be applied first for the purposeof paying the cost of the improvement and that he will apply the same first to the payment of the cost of theimprovement before using any part of the total of the same for any other purpose. Nothing in this subdivision shall beconstrued as imposing upon the grantee any obligation to see to the proper application of such consideration by thegrantor. Nothing in this subdivision shall apply to a deed given by a referee or other person appointed by the court forthe sole purpose of selling real property. Nothing in this subdivision shall apply to the consideration received by agrantor who, pursuant to a written agreement entered into and duly recorded prior to the commencement of theimprovement, conveys to the person making such improvement, the land upon which such improvement is made.However, such a conveyance shall be subject to liens filed prior thereto, as provided by this chapter. To the extent thatthe trust res consists of the right to receive the consideration for such conveyance as distinct from the considerationactually received, breach of the trust shall give rise to a civil action only. The covenant provided for herein shall bedeemed to have been made and to be in full force and effect if, in lieu of the foregoing provisions, a statement insubstantially the following form is contained in the instrument of conveyance, "subject to the trust fund provisions ofsection thirteen of the lien law."

Except that this section shall not apply to any mortgage taken by the home owners' loan corporation, a corporationcreated under an act of congress, known as the "home owners' loan act of nineteen hundred thirty-three," and the "homeowners' loan act of nineteen hundred thirty-three as amended," and said mortgage shall have priority over any and allliens filed subsequent to the date of the recording of said mortgage whether or not the cash and/or bonds for which saidmortgage has been taken as security, shall have been advanced at the time of the execution of such mortgage orsubsequent thereto, and it shall not be necessary to execute and file any building loan contract or any other contract, incompliance with this section or any part thereof.

(6) Every assignment of moneys, or any part thereof, due or to become due under a contract for the improvement of realproperty shall contain a covenant by the assignor that he will receive any moneys advanced thereunder by the assigneeand will hold the right to receive such moneys as trust funds to be first applied to the payment of trust claims as definedin section seventy-one of the lien law, and that he will apply the same to such payments only, before using any part ofthe moneys for any other purpose.

HISTORY:Add, L 1909, ch 38; amd, L 1916, ch 507, § 7, L 1929, ch 515, § 2, eff Oct 1, 1929.Sub (1), amd, L 1947, ch 878, § 4, eff Sept 1, 1947.Sub (1-a), add, L 1942, ch 808, § 13; amd, L 1959, ch 696, § 6, eff Sept 1, 1959.Sub (2), formerly sub 2, amd, L 1930, ch 859, § 7, L 1932, ch 627, § 5, L 1961, ch 956, § 3 (see 1961 note below); so

designated sub (2) and amd, L 1991, ch 336, § 1, eff July 15, 1991.Sub (3), amd, L 1930, ch 859, § 7, L 1932, ch 627, § 5, L 1942, ch 808, § 3, L 1954, ch 672, § 1, L 1991, ch 336, § 1,

eff July 15, 1991.Sub (4), add, L 1932, ch 627, § 6, eff July 1, 1932.Sub (5), add, L 1932, ch 627, § 5; amd, L 1933, ch 164, § 1, L 1942, ch 808, § 12, L 1954, ch 672, § 2, L 1991, ch

336, § 1, eff July 15, 1991.Sub (5), first undesignated par, amd, L 1991, ch 336, § 1, eff July 15, 1991.Sub (5), second undesignated par, add, L 1935, ch 922, § 2, eff May 15, 1935.Sub (6), add, L 1942, ch 808, § 9; amd, L 1959, ch 696, § 6, eff Sept 1, 1959.Sub (7), add, L 1942, ch 808, § 7; repealed, L 1959, ch 696, § 14, eff Sept 1, 1959.

NOTES:

Editor's Notes


Exhibit H: Leonard Engineering, Inc. v. Zephhyr PetroleumCorporation 522 N.Y.S. 2d 900

1 of 56 DOCUMENTS

PositiveAs of: Jun 18, 2014

Leonard Engineering, Inc., Appellant, v. Zephyr Petroleum Corporation et al.,Defendants, and New York Paving, Inc., Respondent

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Appellate Division, Second Department

135 A.D.2d 795; 522 N.Y.S.2d 900; 1987 N.Y. App. Div. LEXIS 52730

December 28, 1987

CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff lien holder, anengineering company, challenged the decision of theSupreme Court, Queens County (New York), whichgranted a motion pursuant to N.Y. Lien Law § 19(6) bydefendant transferee of the subject property, a pavingcompany, discharging a notice of lien. The trial courtgranted the paving company's motion to dismiss thecomplaint and denied the engineering company's crossmotion to amend the notice of lien.

OVERVIEW: The engineering company performedservices for the contracting customer on its property anda balance remained unpaid. The contracting customerthen conveyed the premises to the paving company. Inthe deed, the contracting customer covenanted that itwould hold in trust amounts to pay improvement costs.Before the deed was recorded, the engineering companyfiled a notice of mechanic's lien against the property,however, a rider misdescribed the property and the clerkfiled the notice of lien under a different piece of property.

In the engineering company's action to foreclose the lien,the trial court granted the paving company's motion todischarge the lien and dismiss the complaint. On appeal,the court affirmed the decision. The court held that themisdescription of the premises with respect to anincorrect lot number resulted in a misfiling of the noticethat could not have been discovered in the course of astandard title search, and, therefore, the notice of lien wasvoid on its face and could not be amended. Further, as aresult of the trust fund provision in the deed, the pavingcompany was protected from liability for the debt owedby the contracting customer.

OUTCOME: The court affirmed the discharge of thelien and dismissal of the complaint against the pavingcompany. The court also affirmed the denial of theengineering company's cross motion to amend the noticeof lien.

CORE TERMS: notice of lien, trust fund, conveyance,deed, amend, mechanic's lien, nunc pro tunc, engineering,recording, covenant, block, action to foreclose, right toreceive, purpose of paying, lot number, instrument of

Page 1

conveyance, designed to protect, commencement,designation, incorrect, recorded, grantor, notice, rider

LexisNexis(R) Headnotes

Contracts Law > Types of Contracts > CovenantsReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN1] N.Y. Lien Law § 13(5) provides, in part, asfollows: No instrument of conveyance recordedsubsequent to the commencement of the improvement,and before the expiration of four months after thecompletion thereof, shall be valid as against liens filedwithin four months from the recording of suchconveyance, unless the instrument contains a covenant bythe grantor that he will receive the consideration for suchconveyance and will hold the right to receive suchconsideration as a trust fund to be applied first for thepurpose of paying the cost of the improvement and thathe will apply the same first to the payment of the cost ofthe improvement before using any part of the total of thesame for any other purpose. Nothing in this subdivisionshall be construed as imposing upon the grantee anyobligation to see to the proper application of suchconsideration by the grantor. The covenant provided forherein shall be deemed to have been made and to be infull force and effect if, in lieu of the foregoing provisions,a statement in substantially the following form iscontained in the instrument of conveyance, subject to thetrust fund provisions of § 13 of the lien law.

JUDGES: [***1] Mangano, J. P., Niehoff, Kooper,Spatt and Harwood, JJ., concur.

OPINION

[*795] [**901] In an action to foreclose amechanic's lien, the plaintiff appeals from an order of theSupreme Court, Queens County (Joy, J.), dated October22, 1986, which (1) granted the motion of the defendantNew York Paving, Inc. for an order pursuant to Lien Law§ 19 (6) discharging the notice of lien and, pursuant toCPLR 3211 (a) (7), dismissing the complaint, and (2)denied its cross motion pursuant to Lien Law § 12-a toamend the notice of lien nunc pro tunc.

Ordered that so much of the order as granted themotion of the defendant New York Paving, Inc. to

discharge the lien and dismiss the complaint is affirmed;and it is further,

Ordered that the plaintiff's appeal from so much ofthe order as denied its cross motion to amend the noticeof lien is dismissed as academic; and it is further,

Ordered that the respondent is awarded costs.

The plaintiff Leonard Engineering, Inc. (hereinafterLeonard) entered into an agreement with the defendantZephyr Petroleum Corporation (hereinafter Zephyr) toprovide engineering services at a premises known as37-28 Railroad Avenue, Long Island City, then [***2]owned by Zephyr. The engineering services wereallegedly performed with respect to the subject propertybetween March 20, 1985 and December 19, 1985, andLeonard contends that a balance of $ 26,500 is unpaid.

The defendant Zephyr conveyed the subject premisesto defendant New York Paving, Inc. (hereinafter NewYork Paving) in a transaction wherein the contract andtitle closings took place simultaneously on December 16,1985. Significantly, the deed given by Zephyr to NewYork Paving contains the following provision: "and theparty of the first part [*796] [Zephyr] in compliancewith Section 13 of the Lien Law, covenants that the partyof the first part will receive the consideration for thisconveyance and will hold the right to receive suchconsideration as a trust fund to be applied first for thepurpose of paying the cost of the improvement and willapply the same first to the payment of the cost of theimprovement [**902] before using any part of the totalof the same for any other purpose".

No notice of lien had been filed by the plaintiff onthe date of the conveyance of title to New York Paving.The deed to New York Paving was not recorded untilFebruary 4, [***3] 1986. In the interim, on December30, 1985, the plaintiff filed a notice of mechanic's lienagainst the premises in the office of the County Clerk,Queens County. The notice of lien on its face containedthe correct street address. Attached was a ridercontaining the correct metes and bounds description ofthe premises. However, the rider misdescribed theproperty as block 312, lot 250 instead of its correctdesignation, block 312, lot 2. By reason of this incorrectdesignation, the County Clerk, Queens County, whichfiles liens according to block and lot number, filed thenotice of lien under a different piece of property.

Page 2135 A.D.2d 795, *; 522 N.Y.S.2d 900, **;1987 N.Y. App. Div. LEXIS 52730, ***

Following the commencement of the plaintiff's action toforeclose upon the lien, the defendant New York Pavingmoved to (1) discharge the lien (see, Lien Law § 19 [6]),and (2) dismiss the complaint (see, CPLR 3211 [a] [7]),and the plaintiff then cross-moved to amend the notice oflien nunc pro tunc to correct the erroneous lot number(see, Lien Law § 12-a). The Supreme Court, QueensCounty, granted the motion of the defendant New YorkPaving and denied the plaintiff's cross motion, holding, ineffect, that the misdescription of the premises [***4]with respect to an incorrect lot number resulted in amisfiling of the notice that could not have beendiscovered in the course of a standard title search, and,therefore, the notice of lien was void on its face and couldnot be amended.

We sustain the holding that the plaintiff's notice oflien was ineffective as against the defendant New YorkPaving for different reasons than those stated by theSupreme Court. As a result of the provisions of LienLaw § 13 (5) and the trust fund provision in the deedfrom Zephyr to New York Paving, New York Paving isprotected from liability for the debt owed by Zephyr.

[HN1] Lien Law § 13 (5) provides, in relevant part,as follows: "No instrument of conveyance recordedsubsequent to the commencement [*797] of theimprovement, and before the expiration of four monthsafter the completion thereof, shall be valid as againstliens filed within four months from the recording of suchconveyance, unless the instrument contains a covenant bythe grantor that he will receive the consideration for suchconveyance and will hold the right to receive suchconsideration as a trust fund to be applied first for thepurpose of paying the cost of the improvement [***5]and that he will apply the same first to the payment of thecost of the improvement before using any part of the total

of the same for any other purpose. Nothing in thissubdivision shall be construed as imposing upon thegrantee any obligation to see to the proper application ofsuch consideration by the grantor * * * The covenantprovided for herein shall be deemed to have been madeand to be in full force and effect if, in lieu of theforegoing provisions, a statement in substantially thefollowing form is contained in the instrument ofconveyance, 'subject to the trust fund provisions ofsection thirteen of the lien law'" (emphasis supplied).

While the Lien Law is generally designed to protectcontractors, material providers and other classes ofworkers who supply labor or furnish materials (see, LienLaw § 2), subdivision (5) of section 13 is an exceptionwhich is specifically designed to protect purchasers ofrealty (see, 37 NY Jur, Mechanics' Liens, § 148). Wefind that the trust fund provision in the New York Pavingdeed complies with the statutory requirements. Althoughthe statute refers to "liens filed within four months fromthe recording", in order to further [***6] the underlyingpurpose of Lien Law § 13 (5), this language must beconstrued to include liens filed prior to recording of aconveyance when the conveyance occurred prior to thefiling of the lien. Since the deed to New York Pavingcontained the statutory trust fund provision, the plaintiff'slien is not [**903] valid against the deed conveying theproperty to New York Paving. Accordingly, theplaintiff's recourse, if any, does not lie against New YorkPaving.

The discharge of the lien and dismissal of thecomplaint as against New York Paving render academicthe plaintiff's appeal from so much of the order as deniedits cross motion to amend the notice of lien nunc protunc.

Page 3135 A.D.2d 795, *796; 522 N.Y.S.2d 900, **902;

1987 N.Y. App. Div. LEXIS 52730, ***3

Exhibit I:Monroe Saving Bank v. First Nat’l Bank 50 App.Div. 2d 314, 377 NYS2d 827

Exhibit J: NYCLS Lien § 17

1 of 52 DOCUMENTS


All rights reserved




NY CLS Lien § 17 (2014)

§ 17. Duration of lien

No lien specified in this article shall be a lien for a longer period than one year after the notice of lien has been filed,unless within that time an action is commenced to foreclose the lien, and a notice of the pendency of such action,whether in a court of record or in a court not of record, is filed with the county clerk of the county in which the notice oflien is filed, containing the names of the parties to the action, the object of the action, a brief description of the realproperty affected thereby, and the time of filing the notice of lien; or unless an extension to such lien, except for a lienon real property improved or to be improved with a single family dwelling, is filed with the county clerk of the countyin which the notice of lien is filed within one year from the filing of the original notice of lien, continuing such lien andsuch lien shall be redocketed as of the date of filing such extension. Such extension shall contain the names of the lienorand the owner of the real property against whose interest therein such lien is claimed, a brief description of the realproperty affected by such lien, the amount of such lien, and the date of filing the notice of lien. No lien shall becontinued by such extension for more than one year from the filing thereof. In the event an action is not commenced toforeclose the lien within such extended period, such lien shall be extinguished unless an order be granted by a court ofrecord or a judge or justice thereof, continuing such lien, and such lien shall be redocketed as of the date of grantingsuch order and a statement made that such lien is continued by virtue of such order. A lien on real property improved orto be improved with a single family dwelling may only be extended by an order of a court of record, or a judge orjustice thereof. No lien shall be continued by court order for more than one year from the granting thereof, but a neworder and entry may be made in each of two successive years. If a lienor is made a party defendant in an action toenforce another lien, and the plaintiff or such defendant has filed a notice of the pendency of the action within the timeprescribed in this section, the lien of such defendant is thereby continued. Such action shall be deemed an action toenforce the lien of such defendant lienor. The failure to file a notice of pendency of action shall not abate the action asto any person liable for the payment of the debt specified in the notice of lien, and the action may be prosecuted tojudgment against such person. The provisions of this section in regard to continuing liens shall apply to liens dischargedby deposit or by order on the filing of an undertaking. Where a lien is discharged by deposit or by order, a notice ofpendency of action shall not be filed.

Page 1

A lien, the duration of which has been extended by the filing of a notice of the pendency of an action as above provided,shall nevertheless terminate as a lien after such notice has been canceled as provided in section sixty-five hundredfourteen of the civil practice law and rules or has ceased to be effective as constructive notice as provided in sectionsixty-five hundred thirteen of the civil practice law and rules.

HISTORY:Add, L 1909, ch 38; amd, L 1916, ch 507, § 9, L 1929, ch 515, § 2, 1989, ch 691, § 1 (see 1989 note below), L 1990,

ch 405, § 1, L 2000, ch 324, § 1, eff Jan 1, 2001.Opening par, amd, L 2000, ch 324, § 1, eff Jan 1, 2001.Concluding par, add L 1957, ch 877, § 5; amd, L 1958, ch 116, § 2, L 1970, ch 696, § 1, eff May 12, 1970.

NOTES:

Editor's Notes

Laws 1989, ch 691, § 3, eff Aug 21, 1989, provides as follows:§ 3. This act shall take effect on the thirtieth day after it shall have become a law and shall apply to all existing

mechanic's liens and public improvement liens currently filed and all those filed hereafter.

Revision Notes[1957, ch 877]. This act was recommended by the Judicial Conference and a supporting study for the proposed

changes in the Civil Practice Act is in the Second Annual Report of the Judicial Conference (1956), pages 106-120,126-127. The amendments of sections 17 and 19 of the Lien Law were to incorporate the amendment to section 123 ofthe Civil Practice Act and to have these sections of Lien Law conform to the Civil Practice Act.

A companion bill was submitted dealing with the amendment of section one hundred twenty-four and the creation ofsection one hundred twenty-four-a of the Civil Practice Act. The reason for the two separate bills was that the LawRevision Commission had submitted a bill dealing with the same subject matter (Senate Int. No. 263, Assembly Int.362) as contained in the companion bill recommended by the Judicial Conference.

[1958, ch 116] This act was recommended by the Judicial Conference. Chapter 877 of the Laws of 1957 was enactedat the recommendation of the Judicial Conference, and the purpose of the 1958 legislation was to correct and clarifycertain of those sections passed by the Legislature the previous year.

Practice Insights:

DURATION OF MECHANICS' LIENS



INSIGHTMechanics' liens are inherently temporary, and generally expire within one year unless affirmative action is taken toextend, continue, or enforce them. Therefore, a viable defensive strategy for an owner, who can afford to wait, is to donothing and wait for the lien to expire


Exhibit K: NYCLS Real P § 339 –I

Exhibit L: NYCLS Lien § 19

28 of 88 DOCUMENTS


All rights reserved




NY CLS Lien § 19 (2014)

§ 19. Discharge of lien for private improvement

A lien other than a lien for labor performed or materials furnished for a public improvement specified in this article,may be discharged as follows:

(1) By the certificate of the lienor, duly acknowledged or proved and filed in the office where the notice of lien isfiled, stating that the lien is satisfied or released as to the whole or a portion of the real property affected thereby andmay be discharged in whole or in part, specifying the part. Upon filing such certificate, the county clerk in the officewhere the same is filed, shall note the fact of such filing in the "lien docket" in the column headed "Proceedings had"opposite the docket of such lien.

(2) By failure to begin an action to foreclose such lien or to secure an order continuing it, within one year from thetime of filing the notice of lien, unless an action be begun within the same period to foreclose a mortgage or anothermechanic's lien upon the same property or any part thereof and a notice of pendency of such action is filed according tolaw, but a lien, the duration of which has been extended by the filing of a notice of the pendency of an action as hereinprovided, shall nevertheless terminate as a lien after such notice has been cancelled or has ceased to be effective asconstructive notice.

(3) By order of the court vacating or cancelling such lien of record, for neglect of the lienor to prosecute the same,granted pursuant to section fifty-nine of this chapter.

(4) Either before or after the beginning of an action by the owner or contractor executing a bond or undertaking inan amount equal to one hundred ten percent of such lien conditioned for the payment of any judgment which may berendered against the property for the enforcement of the lien:

a. The execution of any such bond or undertaking by any fidelity or surety company authorized by the laws of thisstate to transact business, shall be sufficient; and where a certificate of qualification has been issued by the [fig 1]superintendent of ifinancial services under the provisions of section one thousand one hundred eleven of the insurancelaw, and has not been revoked, no justification or notice thereof shall be necessary. Any such company may execute any

Page 1

such bond or undertaking as surety by the hand of its officers, or attorney, duly authorized thereto by resolution of itsboard of directors, a certified copy of which resolution, under the seal of said company, shall be filed with each bond orundertaking. Any such bond or undertaking shall be filed with the clerk of the county in which the notice of lien is filed,and a copy shall be served upon the adverse party. The undertaking is effective when so served and filed. If a certificateof qualification issued pursuant to subsections (b), (c) and (d) of section one thousand one hundred eleven of theinsurance law is not filed with the undertaking, a party may except, to the sufficiency of a surety and by a written noticeof exception served upon the adverse party within ten days after receipt, a copy of the undertaking. Exceptions deemedby the court to have been taken unnecessarily, or for vexation or delay, may, upon notice, be set aside, with costs.Where no exception to sureties is taken within ten days or where exceptions taken are set aside, the undertaking shall beallowed.

b. In the case of bonds or undertakings not executed pursuant to paragraph a of this subdivision, the owner orcontractor shall execute an undertaking with two or more sufficient sureties, who shall be free holders, to the clerk ofthe county where the premises are situated. The sureties must together justify in at least double the sum named in theundertaking. A copy of the undertaking, with notice that the sureties will justify before the court, or a judge or justicethereof, at the time and place therein mentioned, must be served upon the lienor or his attorney, not less than five daysbefore such time. Upon the approval of the undertaking by the court, judge or justice an order shall be made by suchcourt, judge or justice discharging such lien.

c. If the lienor cannot be found, or does not appear by attorney, service under this subsection may be made byleaving a copy of such undertaking and notice at the lienor's place of residence, or if a corporation at its principal placeof business within the state as stated in the notice of lien, with a person of suitable age and discretion therein, or if thehouse of his abode or its place of business is not stated in said notice of lien and is not known, then in such manner asthe court may direct. The premises, if any, described in the notice of lien as the lienor's residence or place of businessshall be deemed to be his said residence or its place of business for the purposes of said service at the time thereof,unless it is shown affirmatively that the person servicing the papers or directing the service had knowledge to thecontrary. Notwithstanding the other provisions of this subdivision relating to service of notice, in any case where themailing address of the lienor is outside the state such service may be made by registered or certified mail, return receiptrequested, to such lienor at the mailing address contained in the notice of lien.

d. Except as otherwise provided in this subdivision, the provisions of article twenty-five of the civil practice law andrules regulating undertakings is applicable to a bond or undertaking given for the discharge of a lien on account ofprivate improvements.

(5) Upon filing in the office of the clerk of the county where the property is situated, a transcript of a judgment of acourt of competent jurisdiction, together with due proof of service of due notice of entry thereof, showing a finaldetermination of the action in favor of the owner of the property against which the lien was claimed.

(6) Where it appears from the face of the notice of lien that the claimant has no valid lien by reason of the characterof the labor or materials furnished and for which a lien is claimed, or where for any other reason the notice of lien isinvalid by reason of failure to comply with the provisions of section nine of this article, or where it appears from thepublic records that such notice has not been filed in accordance with the provisions of section ten of this article, theowner or any other party in interest, may apply to the supreme court of this state, or to any justice thereof, or to thecounty judge of the county in which the notice of lien is filed, for an order summarily discharging of record the allegedlien. A copy of the papers upon which application will be made together with a notice setting forth the court or thejustice thereof or the judge to whom the application will be made at a time and place therein mentioned must be servedupon the lienor not less than five days before such time. If the lienor can not be found, such service may be made as thecourt, justice or judge may direct. The application must be made upon a verified petition accompanied by other writtenproof showing a proper case therefor, and upon the approval of the application by the court, justice or judge, an ordershall be made discharging the alleged lien of record.

HISTORY:Add, L 1909, ch 38; amd, L 1909, ch 240, § 53, L 1909, ch 427, § 1, L 1916, ch 507, § 11 L 1920, ch 373, § 1, April


Exhibit M:NYCLS Lien § 59

Exhibit N:NYCLS Lien § 20

Exhibit O: NYCLS Lien § 4

38 of 88 DOCUMENTS


All rights reserved





§ 4. Extent of lien

(1) Such lien shall extend to the owner's right, title or interest in the real property and improvements, existing at thetime of filing the notice of lien, or thereafter acquired, except as hereinafter in this article provided. If an owner assignshis interest in such real property by a general assignment for the benefit of creditors, within thirty days prior to suchfiling, the lien shall extend to the interest thus assigned. If any part of the real property subjected to such lien beremoved by the owner or by any other person, at any time before the discharge thereof, such removal shall not affect therights of the lienor, either in respect to the remaining real property, or the part so removed. If labor is performed for, ormaterials furnished to, a contractor or subcontractor for an improvement, the lien shall not be for a sum greater than thesum earned and unpaid on the contract at the time of filing the notice of lien, and any sum subsequently earned thereon.In no case shall the owner be liable to pay by reason of all liens created pursuant to this article a sum greater than thevalue or agreed price of the labor and materials remaining unpaid, at the time of filing notices of such liens, except ashereinafter provided.

(2) Such lien shall not extend to the owner's right, title or interest in real property and improvements, existing at thetime of filing the notice of lien if such lien arises from the failure of a lessee of the right to explore, develop or producenatural gas or oil, to pay for, compensate or render value for improvements made with the consent or at the request ofsuch lessee by a contractor, subcontractor, materialman, equipment operator or owner, landscaper, nurseryman, orperson or corporation who performs labor or furnishes materials for the exploration, development, or production of oilor natural gas or otherwise improves such leased property. Such lien shall extend to the improvements made for theexploration, development and production of oil and natural gas, and the working interest held by a lessee of the right toexplore, develop or produce oil and natural gas.

(3) Notwithstanding subdivision two if a property owner is also a developer of oil and gas resources and is a party to anagreement with a person or firm authorized to perfect a lien arising out of the failure of such developer to compensate orrender value for improvements to the property upon which an oil or gas well is drilled or established, the lien shallextend to the owners' right or interest in such real property.

Page 1

HISTORY:Add, L 1909, ch 38; amd, L 1916, ch 507, § 2, L 1929, ch 519, § 2, L 1930, ch 859, § 5, eff Oct 1, 1930.Sub (2), add, L 1985, ch 704, § 2, eff Aug 1, 1985 (see 1985 note below).Sub (3), add, L 1985, ch 704, § 2, eff Aug 1, 1985 (see 1985 note below).

NOTES:

Practice Insights:

MECHANICS' LIENS HAVE BROAD SCOPE



INSIGHTA mechanics' lien is a cheap remedy that can be filed unilaterally not only by construction contractors andsubcontractors, but also by certain architects, leasing brokers, and manufacturers, which are seeking payment for workperformed for, or supplies delivered to, real estate. Each of these parties, simply by filing a mechanics' lien, caninterfere with a proposed sale or refinancing, or trigger a default under a mortgage, lease, or construction contract.Moreover, because of the trust fund provisions of the Lien Law, and the Lien Law covenants included in deeds andmortgages, a mechanics' lien can attach to the proceeds of sale of real estate as well as mortgage loan proceeds andpayments due under a construction contract. Therefore, a search should generally be made for mechanics' lien filingsbefore any deed or mortgage is delivered, or any purchase payment or loan advance is made relating thereto

ANALYSIS

Contractors, architects, brokers, and suppliers can file mechanics' liens.

A contractor, subcontractor, architect, broker (procuring commercial lease of more than three years) or supplier, can filea mechanics' lien on account of any "improvement" (defined to include "demolition, erection, alteration or repair" toreal property, architectural plans, and above brokerage services) with the owner's consent. However, a supplier to asupplier cannot file a mechanics' lien. Lien Law §§ 2(4), 3.

Tenant's contractor has right to file mechanics' lien against owner's property if improvements were made withconsent of owner.

A tenant's contractor is not entitled to file a mechanics' lien against the owner's interest in the real estate leased by thetenant unless the improvements are made by such contractor "with the consent or at the request of the owner." Lien Law§§ 3, 4(2). Courts have stated that this consent requires an affirmative act by the owner, and the owner's mereacquiescence is not enough to allow the tenant's contractors to file mechanics' liens against the owner's interest. Also,the owner is not deemed to consent to such improvements merely because the owner delivers consent to the tenant toconfirm that the tenant's improvements do not violate any restrictions in its lease on alterations without the owner'sconsent. Tri-North Builders Inc. v. Di Donna, 217 A.D.2d 886, 629 N.Y.S.2d 850 (1995).

Lien Law claims affect real estate and proceeds.

Sales proceeds received by a seller of real estate, mortgage loan proceeds received by a borrower/mortgagor, andpayments received by contractors and subcontractors under construction contracts, are generally deemed trust funds for


Exhibit P: Robert P. Frink v. Dudley Bierau et al 212 N.Y.S.2d 869

1 of 51 DOCUMENTS

Robert P. Frink, Doing Business under the Name of Pulver Gas and Oil Company,Plaintiff, v. Dudley Bierau et al., Defendants


County Court of New York, Columbia County

27 Misc. 2d 701; 212 N.Y.S.2d 869; 1961 N.Y. Misc. LEXIS 3137

March 30, 1961

DISPOSITION: [***1] The motion for summaryjudgment is granted.

CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff subcontractorbrought an action to foreclose his mechanic's liensagainst defendant property owners. The property ownersmoved for summary judgment.

OVERVIEW: The property owners contracted with ageneral contractor to build a dwelling on land purchasedfrom the general contractor. The subcontractor had doneother heating installations for the general contractor andthose contracts were in default when the subcontractorwas engaged to install the heating equipment for theproperty owners. The subcontractor knew that thecontractor was in serious financial difficulty. Thesubcontractor refused to complete its installation, butagreed to do so after a meeting with the generalcontractor and a property owner. The general contractorwas paid in full at closing on the property, but the generalcontractor did not pay the subcontractor. Thesubcontractor alleged that a property owner had orallypersonally guaranteed payment to the subcontractor at themeeting prior to completion of the installation. The courtgranted summary judgment to the property owners. Themechanic's lien was a nullity. The subcontractor's rightswere measured by the rights of the general contractor.

The subcontractor's rights were extinguished when thegeneral contractor was paid in full.

OUTCOME: The court granted the property owners'motion for summary judgment in the subcontractor'saction to foreclose his mechanic's lien.

CORE TERMS: general contractor, notice of lien,summary judgment, discharging, unenforcible, litigated,attach, lienor, mechanic's lien, time of filing, question offact, separate action, subcontractor, guarantor, notice,installation, dwelling, heating


Contracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' LiensReal Property Law > Construction Law > Contractors &SubcontractorsTorts > Premises Liability & Property > GeneralPremises Liability > Defenses > IndependentContractors[HN1] Where the general contractor is fully paid prior tothe filing of a mechanic's lien, the lienor may not collectfrom the owner of the property.

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Real Property Law > Construction Law > Contractors &SubcontractorsReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN2] If a party furnishing materials is unwilling to relyon the general contractor's integrity, he should protecthimself by acting promptly in giving his notice of lien.

Contracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' LiensReal Property Law > Construction Law > Contractors &SubcontractorsTorts > Premises Liability & Property > GeneralPremises Liability > Defenses > IndependentContractors[HN3] The rights of a subcontractor as a lienor aremeasured by whatever rights the general contractor hadagainst the property owners at the time of filing the noticeof lien.

HEADNOTES

Liens -- mechanic's lien -- summary judgmentdismissing complaint and discharging mechanic's liengranted -- at time of filing lien no fund existed towhich lien could attach as defendant owners had paidgeneral contractor in full -- as lien is unenforcible,other questions raised must be litigated in separateaction, if at all.

1. Defendants' motion for summary judgmentdismissing the complaint and discharging a notice of lienfiled against their property by a subcontractor is granted.At the time the lien was filed the owners had paid thegeneral contractor in full, thus extinguishing any rights hehad against them, so that no fund then existed to which alien could attach.

2. As the lien is unenforcible, the questions ofwhether defendant, by reason of alleged oralcommitments to plaintiff, became a guarantor ofplaintiff's claim, and whether such oral commitments, ifany, would fall within subdivision 2 of section 31 of thePersonal Property Law, are not considered. They mayperhaps be litigated in a separate action.

COUNSEL: John N. McLaren for plaintiff.

Earl Schram, Jr., for defendants.

JUDGES: William F. Christiana, [***2] J.

OPINION BY: CHRISTIANA

OPINION

[*702] [**869] Defendants contracted with oneWeaver to purchase a lot in an area known asBrookbound Development. Weaver, who was a generalcontractor, undertook to build a dwelling on the premisessold. The usual deposit was made upon the execution ofthe agreement.

Plaintiff was engaged by Weaver to install theheating equipment in defendants' dwelling. At such time,plaintiff was also doing other installations for Weaver,who was not only in default on these but was otherwise inserious financial difficulties, a fact known to the parties.

By reason of Weaver's financial instability, plaintiff,after commencing the Bierau project, refused to completethe work. Thereupon, [**870] defendant Dudley Bierauand Weaver called on the plaintiff at the latter's office,where, it is alleged, Bierau made oral commitmentswhich induced plaintiff to finish the installation ofBierau's heating system.

Title was closed, after some delay, on July 21, 1958,at which time, Bierau paid Weaver the full balance calledfor under their contract. Weaver failed to discharge infull his obligation to plaintiff.

Subsequently, and on August 8, 1958, plaintiff[***3] filed notice of a mechanic's lien againstdefendants' property which was continued by order for anadditional year. Prior to its extended expiration, plaintiffinstituted an action to foreclose such lien. Defendantanswered and now moves for summary judgmentdismissing the complaint and discharging the lien.

It is beyond dispute that [HN1] where the generalcontractor is fully paid prior to the filing of the lien thelienor may not collect from the owner of the property. Ifnothing is due the general contractor when the lien isfiled, the lienor may not look to the owner of thepremises for payment. ( Soll v. Camardella, 277 App.Div. 1004; W. E. Blume, Inc. v. Postal Tel. Cable Co.,265 App. Div. 1062; Lien Law, § 4.) The reason is ofcourse obvious. If the property owner is to be exposed toliens filed after he has fully satisfied his obligation to thegeneral contractor he would be doubly emperiled with

Page 227 Misc. 2d 701, *; 212 N.Y.S.2d 869, **;

1961 N.Y. Misc. LEXIS 3137, ***1

possible liability to every subcontractor and materialmanto whom the general contractor was committed to makepayment. As was indicated as early as [*703] Carmanv. McIncrow (13 N. Y. 70) [HN2] if a party furnishingmaterials is unwilling to rely on the general [***4]contractor's integrity, he should protect himself by actingpromptly in giving his notice of lien.

Even so, plaintiff argues that a question of fact existsas to whether defendant, Dudley Bierau, by reason of hisconversations with plaintiff, became a guarantor ofplaintiff's claim, and for this reason, summary judgmentwill not lie. Defendant responds that no question of factcan exist since an oral promise by Bierau, if made, wouldbe confronted with the provisions of subdivision 2 ofsection 31 of the Personal Property Law.

These questions are secondary. They may perhapsbe litigated in a separate independent action. Theprimary inquiry on this motion is the validity of the lien.If the lien is unenforcible issues which might otherwise

arise under it must cede.

In the opinion of this court, the lien is a nullity.[HN3] The rights of the plaintiff as lienor must bemeasured by whatever rights Weaver, as a generalcontractor, had against defendants at the time of filing thenotice of lien. ( Farm Supplies Corp. v. Goldstein, 240App. Div. 330; Van Clief v. Van Vechten, 130 N. Y. 571;Travis v. Nansen, 176 Misc. 44.) [**871] Such rightshad been extinguished [***5] by defendant's payment infull to Weaver prior to the time plaintiff filed his noticeof lien. No fund then existed to which a lien could attach.Where there is no fund, there is no lien, and hence therecan be no foreclosure.

The motion for summary judgment is granted. Anorder may be submitted on notice, without costs,directing judgment in favor of defendants dismissing thecomplaint and discharging the notice of lien.

Page 327 Misc. 2d 701, *702; 212 N.Y.S.2d 869, **870;

1961 N.Y. Misc. LEXIS 3137, ***3

Exhibit Q: County Clerk's instruction (Bond)

Exhibit R: Affirmation for bond-discharge (NY County)

Exhibit S: NYCLS Lien § 34

Exhibit T:Form Waiver

Exhibit U: NYCLS Lien § 37

Exhibit V: NYCLS Lien § 39

Exhibit W: NYCLS Lien § 39a

Exhibit X: NYCLS Lien § 22

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All rights reserved




NY CLS Lien § 22 (2014)

§ 22. Building loan contract

A building loan contract either with or without the sale of land, and any modification thereof, must be in writing andduly acknowledged, and must contain a true statement under oath, verified by the borrower, showing the considerationpaid, or to be paid, for the loan described therein, and showing all other expenses, if any, incurred, or to be incurred inconnection therewith, and the net sum available to the borrower for the improvement, and, on or before the date ofrecording the building loan mortgage made pursuant thereto, to be filed in the office of the clerk of the county in whichany part of the land is situated, except that any subsequent modification of any such building loan contract so filed mustbe filed within ten days after the execution of any such modification. No such building loan contract or anymodification thereof shall be filed in the register's office of any county. If not so filed the interest of each party to suchcontract in the real property affected thereby, is subject to the lien and claim of a person who shall thereafter file anotice of lien under this chapter. A modification of such contract shall not affect or impair the right or interest of aperson, who, previous to the filing of such modification had furnished or contracted to furnish materials, or hadperformed or contracted to perform labor for the improvement of real property, but such right or interest shall bedetermined by the original contract. The county clerk is entitled to a fee of twenty-five dollars, except in counties withinthe city of New York where the fee shall be fifty dollars, for filing such a contract or modification. Except where thecounty clerk maintains a block index, such contracts and modifications thereof shall be indexed in a book provided forthat purpose, in the alphabetical order of the names of the persons to whom such loans shall be made. No assignment ofthe moneys due or to become due under a building loan contract, under the provisions of section twenty-six of thisarticle, nor any payment to the holder of such assignment, shall be or be construed to be a modification of a buildingloan contract within the meaning of this section, and the execution and delivery of a bond and mortgage, under theprovisions of section twenty-six of this article, or payments thereunder, shall not be or be construed to be the making ofa building loan contract within the meaning of this section.

Except that this section shall not apply to any mortgage taken by the home owners' loan corporation, a corporationcreated under an act of congress, known as the "home owners' loan act of nineteen hundred thirty-three" and the "homeowners' loan act of nineteen hundred thirty-three as amended," and said mortgage shall have priority over any and all

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liens filed subsequent to the date of the recording of said mortgage whether or not the cash and/or bonds for which saidmortgage has been taken as security, shall have been advanced at the time of the execution of such mortgage orsubsequent thereto, and it shall not be necessary to execute and file any building loan contract or any other contract, incompliance with this section or any part thereof.

Where the county clerk indexes liens in a block index, every building loan contract presented to the clerk for filing, inorder to entitle the same to be filed, shall contain in the body thereof, or shall have endorsed thereon, a designation ofthe number of every block, on the land map of the county, which is affected by the building loan contract. The countyclerk shall cause such building loan contract to be entered in the block index, under the block number of every block sodesignated. In cases where a building loan contract shall have been filed without such designation or with an erroneousdesignation, the county clerk, on presentation of proper proof thereof, shall enter such instrument in the proper index,under the proper block number of every block in which the land affected is situated, and shall, at the same time, make anote of such entry and of the date thereof in every place in which such instrument may have been erroneously indexed,opposite the entry thereof, and also upon the instrument itself, if the same be in his possession or produced to him forthe purpose, and the filing of such instrument shall be constructive notice as to property in the block not duly designatedat the time of such filing only from the time when the same shall be properly indexed.

A county clerk may adopt a new indexing system utilizing electro-mechanical, electronic or any other method he deemssuitable for maintaining the indexes.

HISTORY:Add, L 1909, ch 38: amd, L 1916, ch 507, § 13, L 1929, ch 515, § 2, L 1930, ch 859, § 14, L 1935, ch 922, § 3, L

1953, ch 349, § 1, L 1956, ch 793, § 4, eff Sept 1, 1956.Opening par, amd, L 1961, ch 237, § 1, L 1965, ch 811, § 1, L 1994, ch 205, § 1, eff June 28, 1994.Concluding par, add, L 1991, ch 648, § 7, eff July 26, 1991.

NOTES:

Revision Notes[1961, ch 237] This amendment was necessary to complete the changes in the section made by Chapter 793 of the

Laws of 1956. The language inserted in § 22 by this act was omitted from chapter 793, Laws of 1956, apparentlythrough inadvertence. The same act of 1956 amended § 122 of the Civil Practice Act and § 10 of the Lien Law and inamending those sections did insert the language which was added by this amendment to § 22.

Practice Insights:

USE OF BUILDING LOAN AGREEMENTS AND MORTGAGES



INSIGHTA building loan in New York State can be used to pay only for most "hard" costs and some "soft" costs of construction,demolition, or repair of real estate (these costs are collectively called "cost of improvement"). A building loan is securedby a building loan mortgage, and is documented by a building loan agreement disclosing the net amount of loanproceeds available to pay such costs. If a building loan is used to pay costs that do not qualify as the "cost ofimprovement," or if the building loan otherwise does not comply with the Lien Law in even a minor respect, then the


Exhibit Y: Title Company Checklists

CHECK LIST FOR CLOSERS

BUILDING LOAN MORTGAGES

Closers must affirmatively answer each item below in the space provided when they aresatisfied that said items have been complied with.

This check list is not intended to be all inclusive but should be used as a guideline.Closers should refer to the annexed Building Loan Mortgage Exceptions andRequirements sheet.

_________ 1. Do the Building Loan Mortgage and Building Loan Contract contain thecovenant required by Section 13, subdivision 3 of the Lien Law?

_________ 2. Do the Building Loan Mortgage and Building Loan Contract make crossreference to each other?

_________ 3. Does the Building Loan Contract contain the borrower's sworn affidavit asrequired under Section 22 of the Lien Law?

_________ 4. Does this affidavit set forth all initial expenses that are to be disbursedfrom the proceeds of the loan? (Only those items as permitted as a cost ofimprovement under Section 2 of the Lien Law may be subtracted from theoriginal amount of the loan - i.e. if prior existing mortgages are to besatisfied, released or assigned. These funds must be itemized.

_________ 5. Does the net sum available for the improvement agree with the amountshown as net sum after all itemized expenses have been subtracted?(Closer must check arithmetic).

_________ 6. Are all Building Loan funds made payable to borrower?If not, do said funds show payment approved by borrower?

_________ 7. Is the affidavit properly executed and acknowledged?

_________ 8. Does our commitment set forth a pending disbursementclause?

_________ 9. Does the Building Loan Mortgage have a "red flag" affixed requiring thatthe Building Loan Contract be filed prior to recording the mortgage?

CHECKLIST

Permissible expenses in Section 22 affidavit:

1. Title charges for building loan2. Interest on building loan during construction3. Mortgage tax for building loan4. Recording fees for building loan5. Taxes, assessments, water and sewer rents paid or to be paid for periods prior

to or during construction6. Bank inspection and appraisal charges for building loan7. Insurance premiums during construction8. Reasonable mortgage broker commissions and lender's attorney's fees for

building loan9. Sums paid to take by assignment prior existing mortgages which are

consolidated with the building loan mortgage or to discharge the mortgages orin reduction thereof and accrued interest thereon

10. Architects, engineers or surveyors11. Premiums on bonds or bonds filed to discharge liens12. Reimbursement to the owner of payments for above expenses made prior to

the date of the initial advance on building loan, and for cost of improvementexpenses such as payroll taxes and labor and materials.

Section 22 affidavit must recite less those expenses the net sum remaining available forthe cost of improvement.

Non-permissable expenses:

1. Land acquisition costs2. “soft costs”, e.g. advertising, managing agents, brochures3. Non-reasonable expenses

The building loan mortgage must contain a Section 13 clause, i.e., that borrower hasreceived the building loan funds in trust for paying for the cost of improvements.

The building loan mortgage must contain a Section-13 clause, i.e., that borrower hasreceived the building loan funds in trust for paying for the cost of improvement.

The building loan mortgage and building loan contract should cross-reference each other.

Exhibit Z: Building Loan Agreement

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Form 8032 — Building Loan Contract

CONSULT YOUR LAWYER BEFORE SIGNING THIS INSTRUMENT—THIS INSTRUMENT SHOULD BE USED BY LAWYERS ONLY.

—————————————————

THIS AGREEMENT, made the day of in the year

BETWEEN

hereinafter referred to as the borrower, and

hereinafter referred to as the lender,

WHEREAS, the borrower has applied to the lender for a loan of

Dollars,

to be advanced as hereinafter provided and to be evidenced by the bond or note of the borrower for the paymentof said sum, or so much thereof as shall at any time be advanced thereon, on

with interest upon each amount so advanced from the date of such advance at the rate of

per centum per annum to be paid on the day of in the year and

thereafter; said bond or note to be secured by a mortgage on the

premises described as follows:

ALL that certain plot, piece or parcel of land, with the buildings and improvements thereon erected, situate,lying and being in the

TOGETHER with all right, title and interest of the mortgagor in and to the land lying in the streets and roads in frontof and adjoining said premises;TOGETHER with all fixtures, chattels and articles of personal property now or hereafter attached to or usedin connection with said premises, including but not limited to furnaces, boilers, oil burners, radiators and piping,coal stokers, plumbing and bathroom fixtures, refrigeration, air conditioning and sprinkler systems, wash-tubs, sinks,gas and electric fixtures, stoves, ranges, awnings, screens, window shades, elevators, motors, dynamos, refrigerators,kitchen cabinets, incinerators, plants and shrubbery and all other equipment and machinery, appliances, fittings, andfixtures of every kind in or used in the operation of the buildings standing on said premises, together with any and allreplacements thereof and additions thereto;

WHEREAS, the lender agrees to make said loan upon the terms, covenants and conditions hereinafter set forth, and theborrower agrees to take said loan and expressly covenants to comply with and perform all of the terms, covenants andconditions of this agreement,

NOW, THEREFORE, it is agreed between the parties as follows:

1. The borrower expressly covenants to make on said premises the improvement described below in accordancewith the plans and specifications therefor which, before the making of the first advance hereunder, the borrower agreesto file with all governmental authorities having jurisdiction and to obtain all necessary approvals of said plans andspecifications and all necessary building permits from said authorities. The said plans and specifications shall first besubmitted to and approved by the lender in writing; and no changes or amendments thereto shall be made withoutfirst obtaining the written approval of the lender. The said improvement to be made shall be as follows:

2. With the approval of the lender, the loan may be evidenced by more than one bond or note aggregating theamount of said loan and be secured by more than one mortgage each covering a portion of the said premises;in that case reference herein made to the bond, note or mortgage shall be deemed to include all of the said bonds,notes or mortgages.

3. With the approval of the lender, the bond or note and mortgage may, for the convenience of the borrower, bewritten for a sum larger than the amount of the loan above specified, but in no case will the lender be obligatedto advance more than the amount of the loan so specified.

4. The said bond or note and mortgage shall be upon the standard forms promulgated by the former NEW YORKBOARD OF TITLE UNDERWRITERS or, at the option of the lender, upon such other forms and containing suchclauses as the lender shall determine are needed for the lender’s protection, and the mortgage shall be executed andacknowledged by all parties necessary to make it, as determined by the lender’s attorney, a valid lien on a good andmarketable title in fee to said premises and on the said fixtures and personal property to be covered thereby for all sumsthat may be advanced, free and clear of all liens, encumbrances and defects, except those, if any, to which the lenderhas expressly agreed herein to take subject or which the lender may hereafter waive. The said bond or note andmortgage are to be delivered on the day of in the year

at M., at the office of

5. The borrower at the time of the execution of this agreement or, at the option of the lender, at the time fixed forthe delivery of the mortgage, shall pay all fees and charges agreed to be paid including the fees, if any, for theprocuring and making of said loan and the charges for the examination of the title to said premises, surveys,appraisals, inspections and drawing of papers, and shall also pay the recording fees and mortgage recording tax andcost of revenue stamps, if any, and architects’, engineers’ and building loan service fees.

6. The said loan is to be advanced at such times and in such amounts as the lender shall determine, buttentatively in installments in accordance with the following schedule:

SCHEDULE OF PAYMENTS

The lender may, as provided in Paragraph 7 of this agreement, advance parts or the whole of any installmentsbefore they become due in accordance with this schedule.

7. No advance shall be due unless, in the judgment of the lender, all work usually done at the stage of constructionwhen the advance is made payable be done in a good and workmanlike manner, and all materials and fixtures usuallyfurnished and installed at that time are furnished and installed, and unless all construction be approved by an engineeror architect satisfactory to the lender, but the lender may advance parts or the whole of any installments before theybecome due, if the lender believes it advisable so to do, and all such advances or payments shall be deemed to havebeen made in pursuance of this agreement and not to be modifications thereof. The making of any advance or any part

of an advance shall not be deemed an approval or acceptance by the lender of the work theretofore done. Any advanceor installment of any part or parts thereof may be postponed or deferred by mutual consent of the borrower and thelender, and any such postponement or postponements shall be deemed to be in pursuance of this agreement and not inmodification thereof. A receipt for any advance shall be binding on the borrower although signed by any one of theindividual parties constituting the borrower, any one partner, if the borrower is a partnership, and any one officer, if theborrower is a corporation.

8. The lender may require five days’ notice in writing from the borrower before an advance shall be called for. Alladvances are to be made at the office of the lender or at such other place as the lender shall designate.

9. The lender may at any time release portions of the mortgaged premises from the provisions of this agreement andfrom the mortgage executed and delivered pursuant thereto upon such terms and conditions as the lender shall deem fit.

10. The lender may at any time extend the payment of the principal secured by said bond or note and mortgage, andany extensions so granted shall be deemed made in pursuance of this agreement and not to be modifications thereof.

11. The borrower shall furnish to the lender, on or before the making of the final advance, the final certificates ofapproval, including certificate of occupancy, of the various governmental authorities having jurisdiction and thecertificate of the Board of Fire Underwriters acting in and for the locality in which the said premises are situated.

12. The borrower shall furnish to the lender, or the lender may procure at the expense of the borrower, surveys madeby a surveyor satisfactory to the lender whenever required by the lender.

13. The borrower shall furnish to the lender, premiums prepaid, or the lender may procure at the expense of theborrower, insurance policies in companies, forms and amounts satisfactory to such lender insuring the premises againstloss or damage by fire, with the usual extended coverage endorsement, and other hazards as may reasonably be requiredby the lender.

14. The lender may at the expense of the borrower employ a watchman to protect the buildings and their contents fromdepredation or injury.

15. If the construction of said buildings be at any time discontinued or not carried on with reasonable dispatch in thejudgment of lender, said lender may purchase materials and employ workmen to protect said buildings so that the samewill not suffer from depredation or the weather, or to complete said buildings, so that they may be used for the purposesfor which they are designed under the said plans and specifications.

16. All sums paid or expended in accordance with any of the foregoing provisions shall be deemed advances to theborrower and secured by said bond or note and mortgage and may be applied, at the option of the lender, to anyadvances thereafter becoming due.

17. The lender may deduct from any payment to be made under this agreement any amount necessary for the paymentof any fees and expenses relating to the examination of the title to said premises, including cost of surveys, charges forappraisals, inspections, drawing of papers, mortgage recording tax, revenue stamps, if any, and architects’, engineers’and building loan service fees, and any expenses incurred in the procuring or the making of the said loan, and in thepayment of any insurance premiums, mortgages, tax, assessment, water rate, sewer rents and other charges, liens andencumbrances upon the said premises whether before or after the making of said loan and any other amounts necessaryfor the payment of the cost of improvement as defined by the Lien Law, and apply such amounts in making saidpayments, and all sums so applied shall be deemed advances under this agreement and secured by said bond or note andmortgage.

18. The lender may cause said loan to be made by some other person or corporation. The bond or note and mortgageshall then run to said person or corporation. The provisions of this agreement shall apply to such bond or note andmortgage, and if the loan be so made, it shall be deemed a compliance by the lender with this agreement. The lendermay assign this agreement and the bond or note and mortgage and cause the assignee or any subsequent assignee tomake any advances not made at the time of the assignment, and all the provisions of this agreement shall continue toapply to said loan and bond or note and mortgage. In case the loan is made in accordance with any of the methodsmentioned in this paragraph 18, it shall be deemed a compliance by the lender with this agreement and to have beenmade pursuant thereto and not to be a modification thereof, and the advances so made shall be secured by said bond ornote and mortgage.

19. In the event of the death of the borrower while still holding title to the mortgaged premises, the lender may, at theoption of the lender, in case the work upon the said improvement is continued as provided in this agreement, continue tomake advances under this agreement and subject to all its terms and conditions to the borrower’s executors oradministrators; and all sums so advanced by the lender shall be deemed advances under this agreement, and not to bemodifications thereof, as if made to the borrower in his lifetime, and shall be secured by said bond or note andmortgage.

20. The borrower will not assign this contract or the moneys due thereunder or convey or encumber the propertywithout the written consent of the lender, but in such event the lender may nevertheless at the option of the lendercontinue to make advances under this agreement to the borrower or to those who succeed to the borrower’s title; and allsums so advanced by the lender shall be deemed advances under this agreement, and not to be modifications thereof,and shall be secured by said bond or note and mortgage.

21. The borrower further agrees: (i) where stairs are required, to erect the permanent stairs with temporary treads asrapidly as the framework erected will permit; (ii) to submit to the lender, for the lender’s approval the details of thefloor construction and framing plans before the contract therefor is let; (iii) to give the lender sufficient notice (a) whentests of the plumbing and heating systems and structural work are to be made; any further tests required by the lenderare to be made by the contractors for such work under the direction of the lender at the expense of the borrower; (b) topermit an examination of all bottoms before any foundation materials are placed or used; and (c) to make an inspectionafter floor filling is completed and before the wood flooring is laid in each story.

22. In case city sewers have not been installed or the street or streets adjacent to the said premises have not been paved,the borrower shall install and properly connect sewers of city specifications as to size and quality and shall pave suchstreet or streets so as to have the same conform to the established city grade thereof; and the borrower shall, upondemand, furnish evidence satisfactory to the lender of compliance with the provisions hereof.

23. The borrower covenants and agrees not to do any act or thing prohibited by the terms of this agreement, and it isexpressly agreed that in any of the following events all obligation on the part of the lender to make said loan or to make

any further advance shall, if the lender so elect, cease and terminate, and the said bond or note and mortgage shall, atthe option of the lender, become immediately due and payable, but the lender may make any advances or parts ofadvances after the happening of any of the following events without thereby waiving the right to demand payment ofthe mortgage debt and without becoming liable to make any other or further advances:

(a) If the mortgage offered by the borrower does not give to the lender a good and sufficient lien for theindebtedness to be secured thereby on said premises satisfactory to the lender’s attorney.

(b) If at the time any payment is due to the borrower the title is not satisfactory to the lender’s attorney, regardlessof whether the lien, encumbrance or other question existed at the time of any prior advance.

(c) If the borrower assigns this contract or any of said advances or any interest therein, or if said premises areconveyed or encumbered in any way without the written consent of the lender, or if the borrower dies beforereceiving the final advance hereunder.

(d) If a survey shows that the improvement on said premises encroaches upon the street or upon adjoiningproperty, or any adjoining structure encroaches upon said premises to an extent deemed material by thelender’s attorney.

(e) If the borrower does not take the loan or the advances within thirty days after they are made pay able, or incase where the payment of advances is dependent upon the erection of a new building, the building be not fullyenclosed within months from date hereof or in any event if the improvement be not fullycompleted and ready for occupancy within months from date hereof.

(f) If the improvement on said premises is, in the judgment of the lender, materially injured or destroyed by fire orotherwise.

(g) If a petition in bankruptcy is filed by or against the borrower or a receiver or trustee of the property of theborrower is appointed; or if the borrower files a petition for reorganization under any of the provisions of theBankruptcy Act or of any other law, state or federal, or makes an assignment for the benefit of creditors or isadjudged insolvent by any state or federal court of competent Jurisdiction.

(h) If the borrower does not make said improvement in accordance with plans and specifications which arepreviously furnished to and approved in writing by the lender and which have been filed with and approved byall governmental authorities having jurisdiction, and in accordance with all laws, rules, regulations andrequirements of such governmental authorities existing at the commencement of the improvement and anyamendments thereof and additions thereto made with the written approval of the lender during the constructionof the improvement or fails to file amended or supplemental plans and specifications, if required because ofsuch amendments and additions after first obtaining the written approval thereof by the fender and the approvalof such governmental authorities; or if the borrower fails to furnish the lender with a written certificate issuedby the department of the governmental authority in the locality in which the property is situated havingjurisdiction thereof approving said plans and specifications and any amended and supplemented plans andspecifications where such department has jurisdiction.

(i) If the owner of said premises does not permit the lender, or representatives of the lender to enter upon saidpremises and inspect the improvement thereon at all reasonable times and examine all detailed plans, shopdrawings and specifications which are kept at the work, or fails to furnish to them, when requested, copies ofsuch plans, drawings and specifications.

(j) If for any cause whatever the construction of said improvement is at any time discontinued or not carried onwith reasonable dispatch in the judgment of the lender.

(k) If the borrower executes any chattel mortgage on any materials, fixtures or articles used in the construction oroperation of the improvement or appurtenant thereto, or articles of personal property placed in said premises,or if any such materials, fixtures or articles are not satisfactory to the lender or are purchased on conditionalbill of sale or otherwise so that the ownership thereof will not vest unconditionally in the borrower, free fromencumbrance, on delivery at the premises; and if the borrower does not furnish to the lender, if requested, thecontracts, bills of sale, statements, receipted vouchers and agreements, or any of them, under which theborrower claims title to such materials, fixtures and articles.

(l) If the borrower fails to comply with any requirement of any governmental authority having jurisdiction withinthirty days after notice in writing of such requirement shall have been given to said borrower; or fails tofurnish to the lender, when requested, official searches made by the governmental authorities havingjurisdiction.

(m) If the borrower does not disclose to the lender, upon demand, the names of all persons with whom theborrower contracted or intends to contract for the construction of said improvement or the furnishing of laboror materials therefor.

(n) If the borrower permits any purchaser or prospective purchaser to occupy the premises before this agreementshall have been fully performed and the final advance made thereunder.

(o) If the borrower fails to keep, observe or perform any of the conditions, stipulations, agreements or covenantscontained in this agreement or in the said bond or note or mortgage.

24. In the event that more than one mortgage is executed pursuant to this agreement and there should be any default bythe borrower in the performance of any of the conditions, stipulations, agreements and covenants contained in thisagreement or in any of the bonds or notes and mortgages given in connection therewith, then, at the option of the lender,the principal indebtedness secured by all or any of such bonds or notes and mortgages shall immediately become dueand payable and all or any such mortgages may be foreclosed in either one or more actions, and any judgment offoreclosure and sale obtained therein may direct that the mortgaged premises covered by all the mortgages sought to beforeclosed in such action be sold in one parcel.

25. The borrower, in compliance with Section 13 of the Lien Law, covenants that the borrower will receive theadvances to be made hereunder and to be secured by the mortgage executed pursuant hereto and will hold the right toreceive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement, and willapply the same first to the payment of the cost of improvement before using any part of the total of the same for anypurpose.

26. And it is mutually understood and agreed by and between the parties hereto on behalf of themselves and theirrespective personal representatives or successors in interest that the bond or note and mortgage contemplated to beexecuted, acknowledged and delivered pursuant to this agreement shall be made subject to all the conditions,stipulations, agreements and covenants contained in this agreement, to the same extent and effect as they would be iffully set forth in and made part of said bond or note and mortgage, until this agreement is terminated by the completionof the improvement described herein and the making of the final advance hereunder as provided for herein; and it isfurther expressly understood and agreed that this agreement is made subject to all the conditions, stipulations,agreements and covenants contained in said bond or note and mortgage, to the same extent and effect as they would beif fully set forth herein and made part hereof.

A true statement under oath, verified by the borrower as required by Section 22 of the Lien Law, is attached heretoand made part of this agreement.

This agreement may not be changed or terminated orally. Wherever the word “lender” is used herein it shall bedeemed to include also the personal representatives, successors and assigns of the lender.

IN WITNESS WHEREOF, the parties hereto have duly executed this agreement the day and year first above written.

IN PRESENCE OF:

STATE OF NEW YORK, COUNTY OF ss.:

being duly sworn, deposes and says:

I reside at No.

I am the of

the borrower mentioned in the within building loan contract.

The consideration paid, or to be paid, by the borrower to the lender for the loan described therein is

Dollars

($ ), and that all other expenses incurred, or to be incurred, in connection with said

loan are as follows:

Broker’s commission, $

Examination and insurance of

title and recording fees, $

Mortgage tax, Architect’s,

engineer’s and surveyor’s fees, $

Internal revenue stamp taxes, $

Inspections, $

Appraisals, $

Conveyancing, $

Building loan service fees, $

Sums paid to take by assignmentprior existing mortgages which areconsolidated with building loanmortgages and also the interestcharges on such mortgages, $

Sums paid to discharge or reduce theindebtedness under mortgages andaccrued interest thereon and otherprior existing encumbrances, $

Sums paid to discharge building loanmortgages whenever recorded, $

Taxes, assessments, water rents andsewer rents paid (existing prior tocommencement of improvement). $

and that the net sum available to the said borrower for the improvement is

Dollars,

($ ), less such amounts as may become due or payable for insurance premiums,

interest on building loan mortgages, ground rent, taxes, assessments, water rents and sewer rents accruing during the

making of the improvement.

This statement is made pursuant to Section 22 of the Lien Law of the State of New York.

The facts herein stated are true to the knowledge of the deponent.

________________________________

Sworn to before me this

day of in the year

STATE OF NEW YORK, COUNTY OF

On the day of in the year ,

before me, the undersigned, personally appeared

, personally known to me or proved to me onthe basis of satisfactory evidence to be the individual(s) whosename(s) is (are) subscribed to the within instrument andacknowledged to me that he/she/they executed the same inhis/her/their capacity(ies), and that by his/her/their signature(s) onthe instrument, the individual(s), or the person on behalf of whichthe individual(s) acted, executed the instrument.

STATE OF , COUNTY OF


before me, the undersigned, a Notary Public in and for said State,

personally appeared

, the

subscribing witness to the foregoing instrument, with whom I am

personally acquainted, who, being by me duly sworn, did depose

and say that he/she/they reside(s) in

(if the place of residence is in a city, include the street and street number if any,

thereof);that he/she/they know(s)

to be the individual described in and who executed the foregoing

instrument; that said subscribing witness was present and saw

said

execute the same; and that said witness at the same time

subscribed his/her/their name(s) as a witness thereto

[add the following if the acknowledgment is taken outside NY State]

and that said subscribing witness made such appearance beforethe undersigned in the (insert the city or other political subdivision

and the State or country or other place the proof was taken).

STATE OF



, personally known to me or proved to meon the basis of satisfactory evidence to be the individual(s) whosename(s) is (are) subscribed to the within instrument andacknowledged to me that he/she/they executed the same inhis/her/their capacity(ies), and that by his/her/their signature(s) onthe instrument, the individual(s), or the person on behalf of whichthe individual(s) acted, executed the instrument


and that said individual made such appearance before theundersigned in the (insert the city or other political subdivision and the

State or country or other place the acknowledgment was taken).



before me personally came

to me known, who, being by me duly sworn, did depose and say

that he resides at

that he is the

of

the corporation described in and which executed the foregoing

instrument; that he knows the seal of said corporation; that the

seal affixed to said instrument is such corporate seal; that it was

so affixed by order of the board of directors of said corporation,

and that he signed h name thereto by like order.

Building Loan ContractTITLE NO.

TO

SECTION

BLOCK

LOT

COUNTY OR TOWN

Distributed By.

RETURN BY MAIL TO:

Exhibit AA: Building Loan Mortgage

Form 8017 — Building Loan Mortgage – Individual or Corporation Revised 1/97

CONSULT YOUR LAWYER BEFORE SIGNING THIS INSTRUMENT—THIS INSTRUMENT SHOULD BE USED BY LAWYERS ONLY.

—————————————————

THIS MORTGAGE, made the day of , in the year

BETWEEN

, the mortgagor,

and

, the mortgagee,

WITNESSETH, that to secure the payment of an indebtedness in the sum of

dollars,

lawful money of the United States or so much thereof as may be advanced, to be paid

with interest thereon to be computed from the date of each advance, at the rate of per

centum per annum, and to be paid on the day of in the year ,

next ensuing and

thereafter,

according to a certain bond,

note or obligation bearing even date herewith, the mortgagor hereby mortgages to the mortgagee

ALL that certain plot, piece or parcel of land, with the buildings and improvements thereon erected, situate, lying andbeing in the

TOGETHER with all right, title and interest of the mortgagor in and to the land lying in the streets and roads in frontof and adjoining said premises;

TOGETHER with all fixtures, chattels and articles of personal property now or hereafter attached to or used inconnection with said premises, including but not limited to furnaces, boilers, oil burners, radiators and piping, coalstokers, plumbing and bathroom fixtures, refrigeration, air conditioning and sprinkler systems, wash-tubs, sinks, gas andelectric fixtures, stoves, ranges, awnings, screens, window shades, elevators, motors, dynamos, refrigerators, kitchencabinets, incinerators, plants and shrubbery and all other equipment and machinery, appliances, fittings, and fixtures ofevery kind in or used in the operation of the buildings standing on said premises, together with any and all replacementsthereof and additions thereto;

TOGETHER with all awards heretofore and hereafter made to the mortgagor for taking by eminent domain the wholeor any part of said premises or any easement therein, including any awards for changes of grade of streets, which saidawards are hereby assigned to the mortgagee, who is hereby authorized to collect and receive the proceeds of suchawards and to give proper receipts and acquittances therefor, and to apply the same toward the payment of the mortgagedebt, notwithstanding the fact that the amount owing thereon may not then be due and payable; and the said mortgagorhereby agrees, upon request, to make, execute and deliver any and all assignments and other instruments sufficient forthe purpose of assigning said awards to the mortgagee, free, clear and discharged of any encumbrances of any kind ornature whatsoever.

AND the mortgagor covenants with the mortgagee as follows:

1. That the mortgagor will pay the indebtedness as hereinbefore provided.

2. That the mortgagor will keep the buildings on the premises insured (i) against loss by fire for the benefit of themortgagee, (ii) against loss by flood if the premises are located in an area identified by the Secretary of Housing andUrban Development as an area having special flood hazards and in which flood insurance has been made availableunder the National Flood Insurance Act of nineteen hundred sixty-eight; that he will assign and deliver the policies tothe mortgagee; and that he will reimburse the mortgagee for any premiums paid for insurance made by the mortgageeon the mortgagor’s default in so insuring the buildings or in so assigning and delivering the policies.

3. That no building on the premises shall be altered, removed or demolished without the consent of the mortgagee.

4. That the whole of said principal sum and interest shall become due at the option of the mortgagee: after default inthe payment of any instalment of principal or of interest for fifteen days; or after default in the payment of any tax,water rate, sewer rent or assessment for thirty days after notice and demand; or after default after notice and demandeither in assigning and delivering the policies insuring the buildings against loss by fire or in reimbursing the mortgageefor premiums paid on such insurance, as hereinbefore provided; or after default upon request in furnishing a statementof the amount due on the mortgage and whether any offsets or defenses exist against the mortgage debt, as hereinafterprovided. An assessment which has been made payable in instalments at the application of the mortgagor or lessee ofthe premises shall nevertheless, for the purpose of this paragraph, be deemed due and payable in its entirety on the daythe first instalment becomes due or payable or a lien.

5. That the holder of this mortgage, in any action to foreclose it, shall be entitled to the appointment of a receiver.

6. That the mortgagor will pay all taxes, assessments, sewer rents or water rates, and in default thereof, the mortgageemay pay the same.

7. That the mortgagor within five days upon request in person or within ten days upon request by mail will furnish awritten statement duly acknowledged of the amount due on this mortgage and whether any offsets or defenses existagainst the mortgage debt.

8. That notice and demand or request may be in writing and may be served in person or by mail.

9. That the mortgagor warrants the title to the premises.

10. That the fire insurance policies required by paragraph No. 2 above shall contain the usual extended coverageendorsement; that in addition thereto the mortgagor, within thirty days after notice and demand, will keep the premisesinsured against war risk and any other hazard that may reasonably be required by the mortgagee. All of the provisionsof paragraphs No. 2 and No. 4 above relating to fire insurance and the provisions of Section 254 of the Real PropertyLaw construing the same shall apply to the additional insurance required by this paragraph.

11. That in case of a foreclosure sale, said premises, or so much thereof as may be affected by this mortgage, may besold in one parcel,

12. That if any action or proceeding be commenced (except an action to foreclose this mortgage or to collect the debtsecured thereby), to which action or proceeding the mortgagee is made a party, or in which it becomes necessary todefend or uphold the lien of this mortgage, all sums paid by the mortgagee for the expense of any litigation to prosecuteor defend the rights and lien created by this mortgage (including reasonable counsel fees), shall be paid by themortgagor, together with interest thereon at the rate of six per cent. per annum, and any such sum and the interestthereon shall be a lien on said premises, prior to any right, or title to interest in or claim upon said premises attaching oraccruing subsequent to the lien of this mortgage, and shall be deemed to be secured by this mortgage. In any action orproceeding to foreclose this mortgage, or to recover or collect the debt secured thereby, the provisions of law respectingthe recovering of costs, disbursements and allowances shall prevail unaffected by this covenant.

13. That the mortgagor hereby assigns to the mortgagee the rents, issues and profits of the premises as further securityfor the payment of said indebtedness, and the mortgagor grants to the mortgagee the right to enter upon and to takepossession of the premises for the purpose of collecting the same and to let the premises or any part thereof, and toapply the rents, issues and profits, after payment of all necessary charges and expenses, on account of said indebtedness.This assignment and grant shall continue in effect until this mortgage is paid. The mortgagee hereby waives the right toenter upon and to take possession of said premises for the purpose of collecting said rents, issues and profits, and themortgagor shall be entitled to collect and receive said rents, issues and profits until default under any of the covenants,conditions or agreements contained in this mortgage, and agrees to use such rents, issues and profits in payment ofprincipal and interest becoming due on this mortgage and in payment of taxes, assessments, sewer rents, water rates andcarrying charges becoming due against said premises, but such right of the mortgagor may be revoked by the mortgageeupon any default, on five days’ written notice. The mortgagor will not, without the written consent of the mortgagee,receive or collect rent from any tenant of said premises or any part thereof for a period of more than one month inadvance, and in the event of any default under this mortgage will pay monthly in advance to the mortgagee, or to anyreceiver appointed to collect said rents, issues and profits, the fair and reasonable rental value for the use andoccupation of said premises or of such part thereof as may be in the possession of the mortgagor, and upon default inany such payment will vacate and surrender the possession of said premises to the mortgagee or to such receiver, and indefault thereof may be evicted by summary proceedings.

14. That the whole of said principal sum and the interest shall become due at the option of the mortgagee: (a) afterfailure to exhibit to the mortgagee, within ten days after demand, receipts showing payment of all taxes, water rates,sewer rents and assessments; or (b) after the actual or threatened alteration, demolition or removal of any building onthe premises without the written consent of the mortgagee; or (c) after the assignment of the rents of the premises or anypart thereof without the written consent of the mortgagee; or (d) if the buildings on said premises are not maintained inreasonably good repair; or (e) after failure to comply with any requirement or order or notice of violation of law or

STATE OF NEW YORK, COUNTY OF



, personally known to me or proved to me onthe basis of satisfactory evidence to be the individual(s) whosename(s) is (are) subscribed to the within instrument andacknowledged to me that he/she/they executed the same inhis/her/their capacity(ies), and that by his/her/their signature(s) onthe instrument, the individual(s), or the person on behalf of whichthe individual(s) acted, executed the instrument.



before me, the undersigned, a Notary Public in and for said State,

personally appeared

, the

subscribing witness to the foregoing instrument, with whom I am

personally acquainted, who, being by me duly sworn, did depose

and say that he/she/they reside(s) in

(if the place of residence is in a city, include the street and street number if any,

thereof);that he/she/they know(s)

to be the individual described in and who executed the foregoing

instrument; that said subscribing witness was present and saw

said

execute the same; and that said witness at the same time

subscribed his/her/their name(s) as a witness thereto


and that said subscribing witness made such appearance beforethe undersigned in the (insert the city or other political subdivision

and the State or country or other place the proof was taken).

STATE OF



, personally known to me or proved to meon the basis of satisfactory evidence to be the individual(s) whosename(s) is (are) subscribed to the within instrument andacknowledged to me that he/she/they executed the same inhis/her/their capacity(ies), and that by his/her/their signature(s) onthe instrument, the individual(s), or the person on behalf of whichthe individual(s) acted, executed the instrument


and that said individual made such appearance before theundersigned in the (insert the city or other political subdivision and the

State or country or other place the acknowledgment was taken).



before me personally came

to me known, who, being by me duly sworn, did depose and say

that he resides at

that he is the

of

the corporation described in and which executed the foregoing

instrument; that he knows the seal of said corporation; that the

seal affixed to said instrument is such corporate seal; that it was

so affixed by order of the board of directors of said corporation,

and that he signed h name thereto by like order.

Building Loan MortgageTITLE NO.

TO

SECTION

BLOCK

LOT

COUNTY OR TOWN

Distributed By

RETURN BY MAIL TO:

Exhibit BB: Form Section 22 Affidavit

Exhibit CC: Nanuet Nat'l Bank v. Eckerson Terrace,Inc.417 N.Y.S. 2d 901

1 of 51 DOCUMENTS

Nanuet National Bank, Appellant, v. Eckerson Terrace, Inc., et al., Defendants, andToken Carpentry, Inc., et al., Respondents


Court of Appeals of New York

47 N.Y.2d 243; 391 N.E.2d 983; 417 N.Y.S.2d 901; 1979 N.Y. LEXIS 2065

April 26, 1979, ArguedJune 7, 1979, Decided

PRIOR HISTORY: Appeal, by permission of theAppellate Division of the Supreme Court in the SecondJudicial Department, from an order of said court, enteredFebruary 14, 1978, which affirmed an order of theSupreme Court at Special Term (Morton B. Silberman,J.), entered in Rockland County, denying various motionsand cross motions for summary judgment. The followingquestion was certified by the Appellate Division: "Wasthe order of this Court, dated February 14, 1978, properlymade?"

Nanuet National Bank held a building loan mortgageon three parcels of land developed by Eckerson Terrace,Inc., which requested an advance of $ 108,000.Complying with the requirements of section 22 of theLien Law for perfecting a lien on the property in favor ofthe lender, the borrower executed, and the bank filed, astatement of the consideration of the loan and of the netsum available to the borrower for the improvement. Thestatement indicated that the consideration and the sumavailable were each $ 108,000. Respondents TokenCarpentry, Inc., and Leon's Plumbing & Heating, Inc.,performed work and supplied materials for which theyqualified as mechanics' lienors on the property, and theirliens were duly filed. The borrower defaulted in itsobligations to the bank, resulting in a foreclosure action,in which the borrower as well as the mechanics' lienorswere named as defendants. Said lienors contended thatmisstatements in the bank's filing rendered its interest

subordinate rather than superior to their own liens. Theyargued that since the bank expected to, and did, deductthe expenses of procuring the loan from its gross amount,it must have realized that considerably less than $108,000 would in fact be the net sum available for theimprovements. On cross motions for summary judgment,Special Term held that the mortgage of a lenderknowingly filing a materially false building loanstatement is subordinated to subsequent mechanics' liens,and denied the motions on the ground that whether thestatement was materially false and whether the bank hadknowledge thereof were disputed questions of fact. TheAppellate Division affirmed.

The Court of Appeals affirmed the order of theAppellate Division, and answered the question certifiedin the affirmative, holding, in an opinion by JudgeFuchsberg, that under section 22 of the Lien Law, alender that knowingly files a building loan contract thatmaterially misrepresents the net sum available to theborrower for the improvement suffers a subordination ofits mortgage to subsequently arising mechanics' liens.

Nanuet Nat. Bank v Eckerson Terrace, 61 AD2d810. Nanuet Nat. Bank v Eckerson Terrace, 47 NY2d .

DISPOSITION: Order affirmed, with costs. Questioncertified answered in the affirmative.

CASE SUMMARY:

Page 1

PROCEDURAL POSTURE: Appellant bank soughtreview of an order from the Appellate Division of theSupreme Court in the Second Judicial Department (NewYork), which held the bank's mortgage was subordinate,pursuant to N.Y. Lien Law § 22, to respondentcontractors' subsequent mechanics' liens because the bankhad knowingly filed a materially false building loanstatement.

OVERVIEW: The bank agreed to make a loan to adeveloper, and having complied with the requirements ofN.Y. Lien Law § 22 for perfecting a lien on thedeveloper's property in favor of the bank, the developerexecuted, and the bank filed, a statement of theconsideration of the loan and of the net sum available tothe developer. Thereafter, the developer hired thecontractors to supply material and perform work, and thecontractors filed mechanics' liens on the property. Whenthe developer defaulted on its obligations to the bank, thecontractors claimed that misstatements in the bank's filinghad rendered its interest subordinate rather than superiorto the contractors' liens. After the appellate court found infavor of the contractors, the bank sought review, and thecourt reversed. Pursuant to § 22, the court held thatbecause the bank had knowingly filed a building loancontract that materially misrepresented the net sumavailable to the developer, the bank had suffered asubordination of its mortgage to the subsequently arisingmechanics' liens.

OUTCOME: The court affirmed an order that held thebank's mortgage was subordinate to the contractors'subsequent mechanics' liens.

CORE TERMS: borrower, lender's, mortgage, buildingloan, contractor, mechanics' liens, mechanics',knowingly, real estate, materially false, subordination,building loan, Lien Law, real property, lienor, covenant,true statement, net amount, reasonable interpretation,duly filed, misrepresents, misstatements, foreclosure,materially, inaccurate, notice, materialman, mortgagor,executing, developer


Contracts Law > Defenses > Fraud &Misrepresentation > General OverviewContracts Law > Secured Transactions > Perfection &

Priority > Priority > Liens > Mechanics' LiensReal Property Law > Nonmortgage Liens > LienPriorities[HN1] Under N.Y. Lien Law § 22, a lender thatknowingly files a building loan contract that materiallymisrepresents the net sum available to a borrower for animprovement suffers a subordination of its mortgage tosubsequently arising mechanics' liens.

Real Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN2] N.Y. Lien Law § 22 states that information as tothe consideration for a loan, related expenses, and the netamount available to a borrower must be filed, and if notso filed, the interest of each party to such contract in thereal property affected thereby is subject to subsequentmechanics' liens.

Governments > Legislation > Interpretation[HN3] The intent of legislators, if ascertainable, is aparticularly important guide to the court's statutoryconstruction.

Contracts Law > Types of Contracts > CovenantsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPriorities[HN4] Relevant portions of N.Y. Lien Law § 13(3) readsthat every such building loan mortgage and everymortgage recorded subsequent to the commencement ofthe improvement and before the expiration of fourmonths after the completion of the improvement shallcontain a covenant by the mortgagor that he will receivethe advances secured thereby and will hold the right toreceive such advances as a trust fund to be applied firstfor the purpose of paying the cost of improvement, andthat he will apply the same first to the payment of the costof improvement before using any part of the total of thesame for any other purpose, provided, however, that if theparty executing the building loan contract is not theowner of the fee but is the party to whom such advancesare to be made, a building loan contract executed andfiled pursuant to N.Y. Lien Law § 22 shall contain thesaid covenant by such party executing such building loancontract, in place of the covenant by the mortgagor in the

Page 247 N.Y.2d 243, *; 391 N.E.2d 983, **;

417 N.Y.S.2d 901, ***; 1979 N.Y. LEXIS 2065

building loan mortgage as hereinbefore provided.Nothing in this subdivision shall be considered asimposing upon the lender any obligation to see to theproper application of such advances by the owner.

Banking Law > Criminal Offenses > Schemes toDefraud > PenaltiesReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN5] A reasonable interpretation of N.Y. Lien Law § 22is that which subjects a bank's interest to thesubordination penalty if it knowingly files a materiallyfalse statement. Obviously, because a false filing is asnare for the unwary contractor no matter who isresponsible for misleading information, a balancedanalysis must focus on optimizing the likelihood thatdeception will not occur. The threat of a loss of priority isan effective deterrent to a lender's indifference to thetruthfulness of its client's statement; in contrast, aborrower has no priority to lose. A bank cannot withimpunity file a statement it knows is inaccurate. In short,a bank's role is a responsible one. It is neither perfunctorynor ministerial.

Governments > Legislation > InterpretationReal Property Law > Nonmortgage Liens > LienPriorities[HN6] The N.Y. Lien Law provisions are to be construedliberally to secure the provision's beneficial interests andpurposes, pursuant to N.Y. Lien Law § 23.

HEADNOTES

Liens -- Mechanic's Lien

Under section 22 of the Lien Law, which providesthat a building loan contract must contain a true statementshowing, among other things, the net amount available tothe borrower, which is to be filed, and if not so filed theinterest of each party to such contract in the real propertyaffected thereby is subject to subsequent mechanics'liens, a lender that knowingly files a building loancontract that materially misrepresents the net sumavailable to the borrower for the improvement suffers asubordination of its mortgage to subsequently arisingmechanics' liens; one of the purposes of section 22 was toreadily enable a contractor to learn exactly what sum the

loan made available to the owner, and the morereasonable interpretation of the statute is that whichsubjects the lender's interest to the subordination penaltyif it knowingly files a materially false statement.

COUNSEL: Samuel Kirschenbaum for appellant. Theconstruction of section 22 of the Lien Law, by the SecondDepartment is contrary to the legislative intent.

Donald Tirschwell for respondents. I. Where a lender hasknowledge of a material misrepresentation of the net sumavailable for the improvement in the borrower's affidavit,subsequently filed mechanics' liens take precedence overthe mortgage. (HNC Realty Co. v Golan Hgts.Developers, 79 Misc 2d 696; Ulster Sav. Bank v TotalCommunities, 55 AD2d 278.) II. The borrower'sstatement was materially false and the lender actuallyknew of such misstatement. III. Legislative history andbackground of section 22 of Lien Law. IV. Section 13 ofthe Lien Law does not grant absolution to lenders whoknowingly violate section 22 of the Lien Law. V. Courtsbelow erred in ruling that lender's affidavit whichcombined three separate improvements and reflected thetotal sum available for the three improvements wascompliance with the requisites of section 22 of the LienLaw.

JUDGES: Chief Judge Cooke and Judges Jasen,Gabrielli, Jones and Wachtler concur with JudgeFuchsberg.

OPINION BY: FUCHSBERG

OPINION

[*245] [**984] [***902] OPINION OF THECOURT

Resolving a dichotomy among departments of theAppellate Division on a matter of no small consequenceto the construction and banking industries, we hold that[HN1] under section 22 of the Lien Law a lender thatknowingly files a building loan contract that materiallymisrepresents the net sum available to the borrower forthe improvement suffers a subordination of its mortgageto subsequently arising mechanics' liens.

Appellant Nanuet National Bank is the holder of abuilding loan mortgage on three parcels of real estatedeveloped for residential use by Eckerson Terrace, Inc.,which requested an advance of $ 36,000 on each plot for

Page 347 N.Y.2d 243, *; 391 N.E.2d 983, **;

417 N.Y.S.2d 901, ***; 1979 N.Y. LEXIS 2065

a total of $ 108,000. Having agreed to make the loan, thebank saw to it that Eckerson followed the proceduredictated by section 22 for perfecting a lien on theproperty in favor of the lender. Complying with thoserequirements, the borrower executed, and the bankthereafter duly filed, a statement of the consideration forthe loan and of the "net sum available to the saidborrower for the improvement". 1 The statementindicated that the consideration and the sum availablewere each $ 108,000. It also [*246] represented that allexpenses connected with the loan were to be "paid byborrower".

1 The relevant portions of section 22 read: "Abuilding loan contract either with or without thesale of land, and any modification thereof, mustbe in writing and duly acknowledged, and mustcontain a true statement under oath, verified bythe borrower, showing the consideration paid, orto be paid, for the loan described therein, andshowing all other expenses, if any, incurred, or tobe incurred in connection therewith, and the netsum available to the borrower for theimprovement, and, on or before the date ofrecording the building loan mortgage madepursuant thereto, to be filed in the office of theclerk of the county in which any part of the land issituated * * *. If not so filed the interest of eachparty to such contract in the real property affectedthereby, is subject to the lien and claim of aperson who shall thereafter file a notice of lienunder this chapter."

It was in the face of record notice of the bank's lienthat respondents Token Carpentry, [**985] Inc., andLeon's Plumbing & Heating, Inc., performed work andsupplied materials for which they qualified as mechanics'lienors on the property. The Token and Leon liens wereduly filed. Perforce, subject to the challenge mounted bythe contractors in this case, their liens, at least pro forma,were junior to that of the bank.

The parties' rights started on their collision coursewhen the borrower defaulted in its obligations to thebank. There ensued this foreclosure action, in which theborrower as well as the mechanics' lienors were named asdefendants. The borrower did not contest the suit, but thecontractors contended, in essence, that misstatements inthe bank's filing rendered its interest subordinate ratherthan superior to their own liens. Specifically, they point

out that, since the bank expected to, and indeed did,deduct the expenses of procuring the loan from its grossamount, it must have realized that considerably less than$ 108,000 would in fact be "the net sum available * * *for the improvement". 2 On the other hand, the bank'sposition, stripped of unnecessary trimmings, is that themisstatements, if any [***903] there be, were not madeby it, but by the borrower on its own behalf and thatsection 22 does not require that a lender guarantee theaccuracy of statements for the filing of which it was onlya conduit.

2 The contractors even suggest, thoughsomewhat imprecisely, that part of the loan to theknowledge of the bank was to be applied insatisfaction of a prior lien.

These contentions having been tested on crossmotions for summary judgment, Special Term, citingHNC Realty Co. v Golan Hgts. Developers (79 Misc 2d696), held that the mortgage of a lender knowingly filinga materially false building loan statement is subordinatedto subsequent mechanics' liens. It then proceeded to denythe motions on the ground that whether the statement wasmaterially false and whether the bank had knowledgethereof were disputed questions of fact. The AppellateDivision, Second Department, in unanimously affirming,expressly rejected the contrary holding of the ThirdDepartment in Ulster Sav. Bank v Total Communities (55AD2d 278). For the reasons which follow we uphold thedetermination before us now.

At the outset, we acknowledge that section 22provides no [*247] explicit answer to the dilemmawhich confronted the courts below. True, [HN2] thestatute tells us that information as to the consideration forthe loan, the related expenses, and the net amountavailable to the borrower must be filed and that "[if] notso filed the interest of each party to such contract in thereal property affected thereby is subject to [subsequentmechanics'] [liens]". But it does not specify whetherthese consequences are to be visited on a lender that doesfile when it turns out that the information filed isinaccurate. In the face of legislative silence, we thereforemust determine whether the words "so filed" refer notmerely to the mechanics of the filing but also to theintegrity of what is filed (see Becker v Huss Co., 43NY2d 527, 541).

[HN3] The intent of the legislators, if ascertainable,is a particularly important guide to our construction.

Page 447 N.Y.2d 243, *245; 391 N.E.2d 983, **984;

417 N.Y.S.2d 901, ***902; 1979 N.Y. LEXIS 2065

Turning for that purpose to the legislative history ofsection 22, we first note that the language at issue had itsgenesis in the economic malaise that prevailed at the endof the 1920's and into the early 1930's. The unusuallyheavy losses which "materialmen, supplymen andlaborers" then suffered motivated the Legislature to takeaction which was thought likely to eradicate its rootcauses (see Report of the Joint Legislative CommitteeInvestigating the Lien Law, Legislative Document No. 32[1930]; see, also, Blanc, Mechanics' Liens, par 46; cf. P.T. McDermott, Inc. v Lawyers Mtge. Co., 232 NY 336,341-342 [discussing preamendment purpose of statute]).Section 22 was amended to readily enable a contractor tolearn exactly what sum the loan in fact made available tothe owner of the real estate for the project (see Hearingsof the Joint Legislative Committee, p 1209 [1930]). Andsubdivision (3) of section 13 of the Lien Law wasamended to strengthen [**986] the statutory provisionsunder which such funds were deemed to be held in trust.3

3 [HN4] Relevant portions of this subdivisionread: "(3) Every such building loan mortgage andevery mortgage recorded subsequent to thecommencement of the improvement and beforethe expiration of four months after the completionof the improvement shall contain a covenant bythe mortgagor that he will receive the advancessecured thereby and will hold the right to receivesuch advances as a trust fund to be applied firstfor the purpose of paying the cost ofimprovement, and that he will apply the same firstto the payment of the cost of improvement beforeusing any part of the total of the same for anyother purpose, provided, however, that if the partyexecuting the building loan contract is not theowner of the fee but is the party to whom suchadvances are to be made, a building loan contractexecuted and filed pursuant to section twenty-twoof this chapter shall contain the said covenant bysuch party executing such building loan contract,in place of the covenant by the mortgagor in thebuilding loan mortgage as hereinbefore provided.Nothing in this subdivision shall be considered asimposing upon the lender any obligation to see tothe proper application of such advances by theowner".

[*248] Consistent with this overriding legislativeobjective, we believe [HN5] the more reasonable

[***904] interpretation of the statute is that whichsubjects the bank's interest to the subordination penalty ifit knowingly files a materially false statement.Obviously, since a false filing is a snare for the unwarycontractor no matter who is responsible for themisleading information, a balanced analysis must focuson optimizing the likelihood that deception will notoccur. The threat of a loss of priority is an effectivedeterrent to a lender's indifference to the truthfulness ofits client's statement; in contrast, the borrower has nopriority to lose. Without attempting to further define thelimits of the bank's obligation, there should be no doubtthat it cannot with impunity file a statement it knows isinaccurate. In short, the bank's role is a responsible one.It is neither perfunctory nor ministerial.

The rule we announce is also consonant with arealistic awareness of the usual interplay among bank,borrower and materialman in the building loan context.The bank's position is pivotal; without its financialsupport, contractors might be unwilling to risk theirresources in a project run by a developer of perhapsquestionable soundness. Frequently the bank is aworking partner in the deal in that it co-ordinates itsadvances to the developer with the actual progress of theconstruction; at times, it may even bargain for an optionto convert its mortgage into an equity interest. Themechanics' lienor, on the other hand, is likely to finditself in a dependent stance; it must rely not only on thetruth of the filed statement that shows how much of thebank's capital is behind the job but also on the periodicadvances which it promises. Our decision also pays heedto the practical consideration that, in many of the cases inwhich the question of priority arises, the materialman willhave no other recourse because the owner is bankrupt(see, generally, Vitt & Bernstein, Convertible Mortgages:New Financing Tool, Real Estate Review, Spring, 1976,at p 33; Practicing Law Institute, Real EstateDevelopment & Construction Financing Handbook[1968], § 5; Marks, Maloney & Paperno, Mortgages andMortgage Foreclosure in New York [rev ed, 1975], §§141-143). 4

4 Although the record does not reveal theborrower's financial condition, as noted, it has notappeared to defend in this action.

[*249] The vital and material parts which lenderstend to play in such transactions are hardlydisproportionate to the obligations we have described.

Page 547 N.Y.2d 243, *247; 391 N.E.2d 983, **985;

417 N.Y.S.2d 901, ***903; 1979 N.Y. LEXIS 2065

After all, the effort required for compliance is modest.Not only does a lender usually operate from a bargainingposition strong enough to demand accurate informationfrom the borrower, but the limited nature of the detailsrequired to be filed suggests they would in any event bewithin the lender's ken.

Consistent with our view, we, of course, cannotaccept the theory advanced in the present case by thebank, that a contrary intent is to be divined from theproviso that lenders not be responsible for how borrowerslater apply the funds loaned (see Lien Law, § 13, subd[3]). The duties we have articulated do not anticipatesupervision of the construction project.

[**987] Finally, we observe that, though no expressprovision in the statute ineluctably compels theconstruction we have adopted, it also comports with

[HN6] the Lien Law's broader mandate that its provisions"be construed liberally to secure [their] beneficialinterests and purposes" (Lien Law, § 23; see, also,Jensen, Mechanics' Lien Law [4th ed],§ 84). This addsfurther support to our conviction that, in harmony withthe over-all motivation for the statutory enactments, theanswer we have found is the very one the Legislaturewould have given had it addressed the precise point atissue in this case (Gray, Nature and Sources of Law, pp172-173, cited with approval as to trusts and conveyancesas well in 2 Scott, Trusts, § 164.1, and in 3 Restatement,Property, § 241, Comment c, respectively).

[***905] For all these reasons, the questioncertified must be answered in the affirmative and theorder of the Appellate Division affirmed.

Page 647 N.Y.2d 243, *249; 391 N.E.2d 983, **986;

417 N.Y.S.2d 901, ***904; 1979 N.Y. LEXIS 2065

Exhibit DD: HNC Realty Co.v. Golan Heights Developers,360 N.Y.S 2d 954

1 of 51 DOCUMENTS

HNC Realty Company, Doing Business as HNC Realty Company, Inc., Plaintiff, v.Golan Heights Developers, Inc., et al., Defendants


Supreme Court of New York, Rockland County


October 25, 1974

CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff mortgagee filed amotion for summary judgment in connection with itsaction to foreclose a consolidated real property mortgageexecuted by defendant mortgagor. Defendant companieshad filed mechanics' liens on lots encumbered by themortgage.

OVERVIEW: The mortgagee was assigned mortgageson properties owned by the mortgagor. The mortgagorand mortgagee later entered into a building loanagreement secured by a building loan mortgage note.They thereafter consolidated the assigned mortgages andthe building loan mortgage into one mortgage. When themortgagor went into arrears, the mortgagee soughtforeclosure. The companies contended that theconsolidated mortgage was subordinate to theirmechanics' liens because the borrower's affidavit falselyoverstated the net sum available to the mortgagor inviolation of N.Y. Lien Law § 22. The court held that theconsolidated mortgage was subordinate to the mechanics'liens under § 22. The court held that a lender who filed abuilding loan contract containing a materially falseborrower's statement, which was known by the lender tobe false at the time of such filing, suffered thesubordination penalty under § 22. The assignedmortgages were subordinated to the mechanics' liensbecause § 22 applied to the lender's entire interest in the

property, including interests obtained through acquisitionby assignment of prior mortgages which were laterconsolidated with the building loan mortgage.

OUTCOME: The court entered a judgmentsubordinating the mortgagee's consolidated mortgage tothe companies' mechanics' liens, in the mortgagee'sforeclosure action against the mortgagor.

CORE TERMS: building loan mortgage, borrower,consolidated, lender, mechanics' liens, mortgage, lienors,subordination, dollars, clerk, foreclosure, recorded, realproperty, property affected, false statement, modification,verified, expended, spread, realty, encumbered, loandescribed, notice of lien, consideration paid, failure tofile, prior mortgages, materially false, subordinated,subordinate, overstated


Governments > Local Governments > FinanceReal Property Law > Financing > Construction LoansReal Property Law > Financing > Mortgages & OtherSecurity Instruments > Formalities[HN1] N.Y. Lien Law § 22 provides in part: a buildingloan contract and any modification thereof, must be inwriting and duly acknowledged, and must contain a true

Page 1

statement under oath, verified by the borrower, showingthe consideration paid, or to be paid, for the loandescribed therein, and showing all other expenses, if any,incurred, or to be incurred in connection therewith, andthe net sum available to the borrower for theimprovement, and, on or before the date of recording thebuilding loan mortgage made pursuant thereto, to be filedin the office of the clerk of the county in which any partof the land is situated, except that any subsequentmodification of any such building loan contract so filedmust be filed within 10 days after the execution of anysuch modification. If not so filed the interest of eachparty to such contract in the real property affectedthereby, is subject to the lien and claim of a person whoshall thereafter file a notice of lien.

Real Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPriorities[HN2] A lender who files a building loan contractcontaining a materially false borrower's statement, whichis known by the lender to be false at the time of suchfiling, must suffer the subordination penalty specified inN.Y. Lien Law § 22.

Real Property Law > Financing > Mortgages & OtherSecurity Instruments > Definitions & Interpretation[HN3] A building loan mortgage is defined by N.Y. LienLaw § 2(14) as a mortgage made pursuant to a buildingloan contract and includes an agreement wherein andwhereby a building loan mortgage is consolidated withexisting mortgages so as to constitute one lien upon themortgaged property.

Real Property Law > Financing > Mortgages & OtherSecurity Instruments > Mortgagee's InterestsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > Transfers > Transfers byMortgageesReal Property Law > Financing > Secondary Financing> Lien Priorities[HN4] When N.Y. Lien Law § 22 speaks of the lender's"interest" in the affected realty being subject to the claimsof subsequent mechanics' lienors, that term is intended toembrace the lender's entire interest, including an interestobtained through acquisition by assignment of priormortgages, which are thereafter consolidated with the

building loan mortgage itself.

HEADNOTES

[***1] Mortgages -- building loan mortgage -- infiled building loan mortgage, borrower's affidavitoverstated "net sum available to the borrower for theimprovement" (Lien Law, § 22), by including moneysused by lender to buy other mortgages which werethereupon consolidated and spread with building loanmortgage to form one large mortgage; therefore,subsequently filed mechanics' liens are superior tosuch consolidated mortgage.

In a filed building and loan contract, the borrower'saffidavit falsely stated that "the net sum available to the ** * borrower for the improvement is $ 9,585,271.92",whereas, out of that total, the sum of $ 3,945,442.95 wasin fact not available "for the improvement" but insteadwas used by the lender to purchase assignments ofmortgages, which mortgages were thereuponconsolidated and spread of record with the recorded $5,704,557.05 building loan mortgage so as to form oneconsolidated mortgage of $ 9,650,000. Therefore,subsequently filed mechanics' liens are superior in lien tothe $ 9,650,000 mortgage (Lien Law, § 22; § 2, subd. 14).

COUNSEL: Paul, Weiss, Rifkind, Wharton & Garrisonfor plaintiff.

Schwartz, Kobb, Scheinert & Hamerman (Donald [***2]Tirschwell of counsel), for Charles J. Reid, Inc., andanother, defendants.

Donald Tirschwell for Sandy Hill Coal & Supply Co.,and others, defendants.

Shapiro & Reeder for Biaggi Giuttari, defendant.

Blecher & Artale, (Donald Tirschwell of counsel), forLeon's Plumbing & Heating, Inc., defendant.

JUDGES: Morton B. Silberman, J.

OPINION BY: SILBERMAN

OPINION

[*697] [**955] This is an action to foreclose acertain consolidated real property mortgage executed bydefendant Golan Heights Developers, Inc. (hereinafter

Page 279 Misc. 2d 696, *; 360 N.Y.S.2d 954, **;

1974 N.Y. Misc. LEXIS 1736, ***

Golan Heights), as mortgagor, in favor of plaintiffhereinafter HNC), as mortgagee. The said mortgage is inthe principal amount of $ 9,650,000, and constitutes alien upon some 187 building lots, some improved, whichare located in numerous different residential subdivisionsin Rockland County.

HNC moves: (a) for summary judgment offoreclosure; (b) for the appointment of a referee tocompute; and (c) for other incidental relief. Severaldefendants have opposed the motion. Numerous othershave entered into stipulations of settlement with HNC,subsquent to the submission of this motion. Several otherdefendants have moved, by separate notices of motion,[***3] for various types of relief. Each of such motionswill be discussed below.

BACKGROUND

The following are the basic facts out of which thisforeclosure action arose:

(1) On January 17, 1973, through a series ofassignments, HNC became the owner and holder of 21mortgages with an aggregate [**956] unpaid principalbalance of $ 3,945,442.95. Those mortgages constitutedliens upon portions of the real property affected by theconsolidated mortgage sought to be foreclosed herein.For convenience, these mortgages are hereinafter referredto as the Assigned Mortgages.

(2) On January 17, 1973, through a series ofconveyances, Golan Heights became the owner in fee ofthe real property encumbered by the aforesaid AssignedMortgages.

(3) On January 17, 1973 HNC and Golan Heightsentered into a building loan contract, whereby HNCagreed to loan Golan [*698] Heights the sum of $9,650,000, to be advanced in periodic installments. Saidbuilding loan contract was filed in the Rockland CountyClerk's office on January 19, 1973.

(4) On January 17, 1973 Golan Heights made anddelivered to HNC a building loan mortgage note in theamount of $ 5,704,557.05, payable in the mannerspecified [***4] therein. Said note is hereinafter referredto as the HNC note.

(5) On January 17, 1973, to secure repayment of theHNC note, Golan Heights executed in HNC's favor a

building loan mortgage. That mortgage was recorded onJanuary 19, 1973 in the Rockland County Clerk's office.

(6) On January 17, 1973 HNC and Golan Heightsentered into an agreement whereby the AssignedMortgages (referred to in [1], supra) and the buildingloan mortgage (referred to in [5], supra were, in HNC'swords, "consolidated, coordinated, modified and spreadso that together they would thereafter constitute in lawbut one first mortgage, a single lien, securing theprincipal sum of $ 9,650,000.00 and interest" upon theencumbered real property. The foregoing agreement wasrecorded on January 19, 1973 in the Rockland CountyClerk's office.

(7) On February 13, 1973, the afore-mentionedagreements were modified to embrace two additionalparcels of real property. This agreement was recorded onFebruary 14, 1973 in the Rockland County Clerk's office.

HNC alleges that between January 17, 1973 andSeptember 21, 1973 it advanced to Golan Heights $6,761,095.17; that Golan Heights repaid a total of $[***5] 2,432,524.47; and that the present unpaidprincipal balance due and owing is $ 4,328,570.70. HNCfurther alleges that Golan Heights "fell permanently inarrears" in interest payments commencing with June 1,1973. (Interest continues to accrue at the approximaterate of $ 60,000 per month.) Based upon the foregoing,and other defaults, HNC seeks a judgment of foreclosure.

[**957] OPPOSITION TO THE MOTION FORSUMMARY JUDGMENT

Defendants Charles J. Reid, Inc., Cornell & Reid,Inc., Sandy Hill Coal & Supply Company and Leon'sPlumbing & Heating Co., Inc., have filed mechanics'liens against numerous lots encumbered by theconsolidated HNC mortgage. The aggregate amountallegedly due these defendants is $ 44,145.39.

[*699] The answer of the above-named lienorscontain denials, affirmative defenses and a counterclaimfor foreclosure of their respective mechanic's liens. Insubstance, these lienors contend that HNC's mortgage issubordinate to their mechanic's liens by reason of certainalleged violations of section 22 of the Lien Law.

Insofar as relevant hereto, said [HN1] section 22 ofthe Lien Law provides as follows: "A building loancontract * * * and any modification thereof, [***6] must

Page 379 Misc. 2d 696, *697; 360 N.Y.S.2d 954, **955;

1974 N.Y. Misc. LEXIS 1736, ***2

be in writing and duly acknowledged, and must contain atrue statement under oath, verified by the borrower,showing the consideration paid, or to be paid, for theloan described therein, and showing all other expenses, ifany, incurred, or to be incurred in connection therewith,and the net sum available to the borrower for theimprovement, and, on or before the date of recording thebuilding loan mortgage made pursuant thereto, to be filedin the office of the clerk of the county in which any partof the land is situated, except that any subsequentmodification of any such building loan contract so filedmust be filed within ten days after the execution of anysuch modification. * * * If not so filed the interest of eachparty to such contract in the real property affectedthereby, is subject to the lien and claim of a person whoshall thereafter file a notice of lien under this chapter."(Emphasis added.)

The lienors allege that section 22 was violated,because the borrower's affidavit filed herein, among otherthings, falsely stated that "the net sum available to the * ** borrower for the improvement is $ 9,585,271.92";whereas, in fact, the sum of $ 3,945,442.95 [***7] wasdeducted from the foregoing sum and used to acquire theAssigned Mortgages and, therefore, was not available tothe borrower for the improvement.

The aforesaid sum of $ 3,945,442.95 expended toacquire the Assigned Mortgages obviously accounts forthe difference between the sum to be advanced accordingto the terms of the building loan contract (i.e., $9,650,000) and the principal amount of the HNC buildingloan mortgage (i.e., $ 5,704,557.05). Thus, there is noquestion or dispute but that HNC knew at the time theborrower's [**958] affidavit was executed that only 5.7million dollars would actually be available to theborrower for the improvement, and not 9.5 million dollarsas represented in the borrower's affidavit.

HNC does not deny knowledge of the foregoing, butcontends: (a) that section 22 of the Lien Law was notviolated thereby; (b) that even if there was a violation ofsection 22, the penalty of subordination flows only from afailure to file a building loan [*700] contract, and notfrom a mere filing of a defective borrower's affidavit; and(c) that even if its consolidated building loan mortgage issubordinated by operation of section 22, the lien of[***8] the Assigned Mortgages remains unimpaired andsuperior to defendant's subsequently filed mechanic'sliens.

As originally enacted in 1897 as section 21 of theLien Law (L. 1897, ch. 418), and amended in 1909 (L.1909, ch. 38), section 22 of the Lien Law required onlythat a building loan contract be in writing, acknowledgedand filed; and, like the statute in its present form,imposed the penalty of subordination of the mortgagee'slien when the building loan contract was "not so filed."The requirement that such filed contracts also contain averified borrower's statement was added to section 22 in1930 (L. 1930, ch. 859, § 14).

Prior to the addition of the borrower's statementrequirement, section 22 was regarded as having beenintended simply "to acquaint prospective contractors withthe fact that they furnish labor and materials subject toclaims prior to theirs against the property". ( McDermottv. Lawyers Mtge. Co., 232 N. Y. 336, 341.) Thus viewed,in its pre-1930 form, section 22 did not require a buildingloan contract to contain any provision "for the dispositionof the proceeds of the loan". ( Pennsylvania Steel Co. v.Title Guar. & Trust Co., 193 N. Y. [***9] 37, 42.)Consequently, the subordination penalty could not beinvoked when prior mortgages were satisfied out of theproceeds realized from a building loan, and that fact wasnot disclosed in the filed building loan contract (see, e.g.,Pennsylvania Steel Co. v. Title Guar. & Trust Co., supra;Summers Lbr. & Supply Corp. v. Barbara Constr. Corp.,255 N. Y. 525).

It was thus possible under the pre-1930 version ofsection 22, where a building loan contract had been filed,for materialmen to be misled into believing that greatersums were available to the borrower for the improvementthan actually were. The 1930 amendment was obviouslydesigned to overcome that deficiency in the statute. Aspreviously stated, the 1930 amendment (L. 1930, ch. 859,§ 14) required every filed building loan contract tocontain "a true statement under oath, verified by theborrower, showing the consideration paid, or to be paid,for the loan described therein, and showing all otherexpenses, if any, incurred, or to be incurred in connectiontherewith, and the net sum available to the borrower forthe improvement".

[**959] HNC's contention that the subordinationpenalty flows only from [***10] a complete failure tofile a building loan contract, but not from the filing of abuilding loan contract containing a materially [*701]false borrower's statement, is not supported by the case,law. It also ignores and defeats the salutary purpose of

Page 479 Misc. 2d 696, *699; 360 N.Y.S.2d 954, **957;

1974 N.Y. Misc. LEXIS 1736, ***6

the statute. The potential danger to prospective suppliersof material and labor is just as great when the borrower'sstatement grossly overstates the net sum actuallyavailable to the borrower for the improvement as whenthe building loan contract is not filed at all.

Prudential Ins. Co. of Amer. v. Songood Realty (N.Y. L. J., Feb. 21, 1939, p. 835, col. 7), upon which HNCplaces principal reliance, is immediately distinguishablefrom the present case. The borrower in Prudential used a$ 150,000 building loan advance to satisfy pre-existingliens against the mortgaged premises. However, thelender in Prudential, unlike HNC, had absolutely noknowledge that the proceeds were to be used by theborrower for such purposes. Moreover, in Prudential noclaim was advanced concerning the filing of a falseborrower's statement. The sole ground upon which thedefendant lienors in Prudential assailed the payments[***11] in question was that same were made with theknowledge and consent of the lender and in contraventionof the "trust fund" provisions of the Lien Law and of thebuilding loan contract. Thus, the issue before the court inthe present case was neither raised nor decided inPrudential.

Pennsylvania Steel Co. v. Title Guar. & Trust Co.(193 N. Y. 37, supra), also relied upon by HNC, wasdecided in 1908, long before the addition to section 22 ofthe Lien Law of the requirement that a borrower'sstatement be filed with a building loan contract. In fact,it was conceded in Pennsylvania Steel (p. 42) that undersection 22, as it then existed, "' a building loan agreementneed not provide for the disposition of the proceeds of theloan'" (emphasis in original).

Summers Lbr. & Supply Corp. v. Barbara Constr.Corp. (255 N. Y. 525, supra), which is also cited byHNC, was apparently decided upon facts which occurredprior to the 1930 amendment to section 22 and, in anyevent, did not involve the issue of a false borrower'sstatement.

Finally, in West Side Fed. Sav. & Loan Assn. v.Amato Realty Corp. (N. Y. L. J., Jan. 2, 1943, p. 8, col.7), also [***12] relied upon by HNC, a $ 200 payment insatisfaction of a pre-existing lien was challenged as animproper "preferential" payment. No claim wasadvanced that a false borrower's statement had been filed.

The court concludes that [HN2] a lender who files abuilding loan contract containing a materially false

borrower's statement, [*702] which is [**960] knownby the lender to be false at the time of such filing, mustsuffer the subordination penalty specified in section 22 ofthe Lien Law.

The false statement in the borrower's affidavit hereinwas most material and substantial. The net sum availableto the borrower for the improvement was overstated bysome 3.9 million dollars. The borrower's statement wasprepared from a printed form which contained a space forinsertion of the amount of "Sums paid to take byassignment prior existing mortgages which areconsolidated with building loan mortgages". That spacewas left blank, indicating that no sums were expended forsuch purposes; whereas, in fact some 3.9 million dollarswere expended for just that purpose. In addition, theborrower's affidavit contains the express false statementthat "the net sum available to the borrower [***13] forthe improvement is $ 9,585,271.92". In fact, only 5.7million dollars was actually available. Whether or not thedefendant mechanics' lienors actually relied upon thefalse statements is immaterial (see McDermott v. LawyersMtge. Co., 232 N. Y. 336, supra; Sohmer v. GedneyHills, 8 A D 2d 959).

The only remaining question concerns HNC'scontention that even if its building loan mortgage issubordinated by operation of section 22 of the Lien Law,the lien of the Assigned Mortgages is unaffected therebyand remains superior to defendants' subsequently filedmechanic's liens. HNC has made a compelling argumentin support of such contention. However, in the court'sopinion, the result urged by HNC is precluded by thelanguage of section 22.

The penalty for violation of section 22 is stated inthat section as follows: "The interest of each party to such[building loan] contract in the real property affectedthereby, is subject to the lien and claim of a person whoshall thereafter file a notice of lien under this chapter."

[HN3] A building loan mortgage is defined bysubdivision 14 of section 2 of the Lien Law as "amortgage made pursuant to a building loan contract[***14] and includes an agreement wherein and wherebya building loan mortgage is consolidated with existingmortgages so as to constitute one lien upon themortgaged property."

Therefore, it must be assumed that, [HN4] whensection 22 speaks of the lender's "interest" in the affected

Page 579 Misc. 2d 696, *701; 360 N.Y.S.2d 954, **959;

1974 N.Y. Misc. LEXIS 1736, ***10

realty being subject to the claims of subsequentmechanic's lienors, that term was intended to embrace thelender's entire interest, including an interest obtainedthrough acquisition by assignment of prior [*703]mortgages, which are thereafter consolidated with thebuilding loan mortgage itself.

If the foregoing seems harsh, and it is, it must beunderstood that we are here dealing not with equitableredress, but with a statutorily imposed penalty. Thatpenalty was deemed necessary by the Legislature[**961] to vindicate the strong public policy upon whichsection 22 is founded. As the Court of Appeals tersely

observed in McDermott v. Lawyers Mtge. Co. (232 N. Y.336, 348, supra), a lender who violates section 22 "mustsuffer the consequences."

The court, therefore, concludes that HNC'sconsolidated mortgage, which is sought to be foreclosedherein, is subordinate, by operation of section [***15] 22of the Lien Law, to the mechanics' liens of defendantsCharles J. Reid, Inc., Cornell & Reid, Inc., Sandy HillCoal & Supply Company and Leon's Plumbing &Heating Co., Inc.

(Balance of opinion omitted from publication.)

Page 679 Misc. 2d 696, *702; 360 N.Y.S.2d 954, **960;

1974 N.Y. Misc. LEXIS 1736, ***14

Exhibit EE: Security National Bank v. Village Mall atHillcrest, 382 N.Y.S. 2d 882

21 of 51 DOCUMENTS

Security National Bank, Plaintiff, v. Village Mall at Hillcrest, Inc., et al., Defendants


Supreme Court of New York, Special Term, Queens County


March 26, 1976

CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff lead lender fileda foreclosure action against defendant mortgagor,personal guarantors, mechanic's lienors, corporations, andoccupants of buildings. Defendant mechanic's lienors andthe Attorney General for the People of the State of NewYork filed answers. Various defendants filed motions forsummary judgment. One defendant mechanic's lienorfiled for leave to amend its answer, and another filed forthe appointment of a receiver.

OVERVIEW: The lead lender provided a $ 16,000,000loan for the construction of residential buildings andcondominiums. The lead lender filed to foreclose on theloan against the mortgagor, personal guarantors,mechanic's lienors, corporations, and occupants ofbuildings. The state attorney general filed an answer onbehalf of the buildings' occupants, and variousmechanic's lienors filed answers as well. The otherparties filed various motions, including summaryjudgment motions, motions for leave to amend an answerpreviously filed, and a motion for the appointment of areceiver. The court held that the lien of the contractvendees were not superior to those of the mechanic'slienors. In interpreting the N.Y. Lien Law, the court alsoheld that where an essential term of a building loancontract was changed, a modification must be filed.Examples cited by the court of essential terms were theamount or manner of payment. In holding that the lead

lender's lien was subordinate to those of the mechanic'slienors, the court reasoned that the collective effect of themodifications required a filing that did not occur.

OUTCOME: The court granted various defendants'motions for summary judgment in part, granted themechanic's lienor's motion to amend its answer, granted adefendant's motion for the appointment of a receiver inpart, denied the Attorney General's motion for summaryjudgment, and denied all other pending motions.

CORE TERMS: modification, building loan, lienor,mechanic's, mortgage, lender, receiver, summaryjudgment, borrower, vendee, condominium, contractor,movant, mechanic's liens, commercial building, countyclerk's office, condominium units, affirmative defenses,equitable, conveyed, common charges, residential,apartment, managers, notice, rental, realty, Lien Law,subordinate, materialman


Commercial Law (UCC) > Secured Transactions(Article 9) > Priority > General OverviewContracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' LiensEstate, Gift & Trust Law > Trusts > Beneficiaries >General Overview

Page 1

[HN1] N.Y. Lien Law § 71-a provides that a mechanic'slienor trust fund beneficiary is superior to that of acontract vendee. The claim of the beneficiary of a lienlaw trust is junior to that of one holding a mechanic's lienresulting from the same construction project.

Contracts Law > Contract Modifications > GeneralOverviewReal Property Law > Financing > Construction Loans[HN2] See N.Y. Lien Law § 22.

Contracts Law > Contract Modifications > GeneralOverview[HN3] Even though the N.Y. Lien Law provides that anysubsequent modification of any such building loancontract must be filed, not every change in the buildingloan contract rises to the status of a modification.

Contracts Law > Contract Modifications > GeneralOverviewReal Property Law > Financing > Construction Loans[HN4] Where an essential term of the building loancontract is changed, such as the amount or manner ofpayment, a modification must be filed. Those termswhich are required to be stated in the building loancontract by virtue of the terms of N.Y. Lien Law § 22should also be deemed material when dealing withmodifications. The terms listed in § 22 are theconsideration paid or to be paid for the loan, theexpenses, if any, to be incurred in connection therewith,and the net sum available to the borrower for theimprovement. Any modification dealing with thesematters is, as a matter of law, to be considered essential.

Commercial Law (UCC) > Secured Transactions(Article 9) > Perfection > Methods > Filings > GeneralOverview[HN5] The statutory requirement of filing pursuant toN.Y. Lien Law § 22 is absolute, and a lienor's knowledgeof the agreement is not a substitute for the filing.

Contracts Law > Contract Modifications > GeneralOverviewEstate, Gift & Trust Law > Trusts > General OverviewReal Property Law > Financing > Construction Loans[HN6] Two parties to a building loan contract cannotagree to abrogate the provisions of N.Y. Lien Law § 22 to

the detriment of those for whom that section was enactedby providing that no change in the agreement shall bedeemed a modification.

Civil Procedure > Equity > Relief[HN7] Once equity is invoked the court may do equity asto all parties and for complete relief.

Commercial Law (UCC) > Secured Transactions(Article 9) > Priority > General OverviewContracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' Liens[HN8] See N.Y. Lien Law § 13(1).

Commercial Law (UCC) > Secured Transactions(Article 9) > Priority > General OverviewContracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' Liens[HN9] N.Y. Lien Law § 56 states that a laborer,subcontractor, or materialman is prior to the person forwhom he performed the labor or furnished materials.

Real Property Law > Financing > Mortgages & OtherSecurity Instruments > Transfers > AssumptionsReal Property Law > Nonmortgage Liens > LienPrioritiesTax Law > State & Local Taxes > Administration &Proceedings > Tax Liens[HN10] Avoidance of a multiplicity of actions incircumstances where there is a community of interest inthe subject matter and in the questions of law and factinvolved in the general controversy are grounds forassumption of jurisdiction by equity.

Commercial Law (UCC) > Secured Transactions(Article 9) > Perfection > Methods > Filings > GeneralOverviewReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN11] N.Y. Real Prop. Law § 339-aa states that the lienprovided for in N.Y. Real Prop. Law § 339-z shall beeffective from and after the filing in the office of therecording officer.

HEADNOTES

Page 285 Misc. 2d 771, *; 382 N.Y.S.2d 882, **;

1976 N.Y. Misc. LEXIS 2057, ***

[***1] Mortgages -- modification of buildingloan agreement -- subordination of mortgage lien tosubsequent mechanic's liens -- mortgage lien ofplaintiff, lead lender on $ 16,000,000 construction loancovering two residential apartment buildings andcommercial building, is subordinate to that ofmechanic's lienors since plaintiff failed to file twosubstantive modifications of building loan contract incounty clerk's office (Lien Law, § 22); conversion ofresidential apartments from rental to individualcondominium units was substantial modificationaffecting security of mechanic's lienors which shouldhave been filed -- modification of retainage agreementfor final advance from 10% to 5%, reducing by $800,000 amount of money which mechanic's lienorscould reasonably have expected to be available atcompletion of project, was also substantial andmaterial change which could have been detrimental tocontractors and which therefore should have beenfiled -- Attorney-General may assert affirmativedefenses based on violations of full disclosureprovisions relating to condominiums (GeneralBusiness Law, § 352-e; Real Property Law, § 339-ee).

1. Plaintiff is the lead lender on a $ [***2]16,000,000 construction loan secured by a consolidatedmortgage on property originally consisting of residentialrental apartments, a parking area and a commercialbuilding. A modification of the building loan mortgagepermitted the owner mortgagor to convert the tworesidential buildings into condominiums. Of the 458condominium units which have been constructed, 285have been conveyed and 46 have been placed undercontract but not closed. The unrefunded down paymentson these units aggregate $ 165,000. Subsequent to theconveyance of the 285 units, mechanic's liens totaling $2,500,000 were filed against the property. In this actionto foreclose the consolidated building loan mortgage,plaintiff's mortgage lien is subordinate to that of themechanic's lienors since plaintiff failed to file twosubsequent substantive modifications of the building loancontract in the county clerk's office as required by section22 of the Lien Law. Section 22 is a safeguard againstsecret arrangements between lender and owner orcontractor. It requires that all building loan contracts andany modifications thereof be filed. The object is toacquaint prospective contractors with the exact amount[***3] of money to be advanced, the purposes to whichit is to be applied and the times when or the stages atwhich advances are to be made. In the event of failure to

comply with the statute, the interest in the real propertyof each party to the agreement is subjected to the lien andclaim of the materialman thereafter filing his notice oflien. The conversion of the residential apartments fromrental to individual condominium units was a substantialmodification which should have been filed in the countyclerk's office. The modification substantially diluted thesecurity upon which the mechanic's lienors were entitledto rely in the making of their business decisionsconcerning extension of credit to the builder. The res towhich their liens would attach that stood to safeguardtheir interest was depleted by 62%, representing theapproximate percentage of the value of the improvementthat could not be reached by their liens because suchamount had been conveyed to 285 individualcondominium unit fee owners.

2. In addition, the modification of the schedule ofpayments provision of the original building loan contractshould have been duly filed. The contract set outconditions [***4] precedent to the final advance, "whichshall not be less than 10% of the loan", including deliveryof a survey showing the completed improvement, apermanent certificate of occupancy, a board of fireunderwriters certificate, and purchase of the loan by anew permanent lender. Plaintiff agreed to reduce the 10%retainage to 5%, even though all the conditions precedenthad not been met. The modification of the retainageagreement reduced by $ 800,000 the amount of moneywhich the mechanic's lienors could reasonably haveexpected to be available at the completion of the project.This is a substantial and material change which couldhave been detrimental to the contractors and shouldtherefore have been filed.

3. Although the State was only made defendant tobar it from collecting any unpaid corporate franchisetaxes due, the Attorney-General may properly assertaffirmative defenses based upon plaintiff's allegedviolation of the full disclosure provision relating to publicofferings of co-operative interests in realty (GeneralBusiness Law, § 352-e) as it applies to condominiums(Real Property Law, § 339-ee). The Attorney-Generalhas standing to assert claims on behalf of the [***5]contract vendees, concerning the unrefunded downpayments, on behalf of the occupants of the conveyedcondominium units who are liable for the commoncharges attributable to the common elements of theproperty involved because of the lack of revenue from theunconveyed units, and the public at large. However, the

Page 385 Misc. 2d 771, *; 382 N.Y.S.2d 882, **;

1976 N.Y. Misc. LEXIS 2057, ***

question of whether the claims of the contract vendeesagainst the mortgaged property are superior to that ofplaintiff may not be summarily determined.

COUNSEL: Shea Gould Climenko Kramer & Casey forplaintiff.

Weisman, Celler, Spett, Modlin & Wertherime;Greenberg, Trayman, Harris, Cantor, Reiss & Balsky;Sacks & Bernstein; Donald J. Zimmer; Golenbock &Barell; Otterbourg, Steindler, Houston & Rosen, P. C.;Young, Sonnenfeld & Busner; Leon D. Mitrany; Altieri,Kushner & Miuccio; Hynes & Diamond; DonaldTirschwell; Goetz & Fitzpatrick, P. C.; Taback &Hyams; Baron & Baron; Weiss Rosenthal Heller &Schwartzman; Finley, Kumble, Heine, Underberg &Grutman; Friedland & Masone; Louis J. Lefkowitz,Attorney-General; Amen Weisman & Butler; fordefendants.

JUDGES: Angelo Graci, J.

OPINION BY: GRACI

OPINION

[*772] [**885] This is an action to foreclose aconsolidated building [***6] loan mortgage on realproperty located in this county. The plaintiff is the leadlender on a $ 16,000,000 construction loan, secured by aconsolidated mortgage dated June 28, 1972. Asoriginally planned, the property was to consist ofresidential rental apartments, a parking area and acommercial building.

The commercial building, although part of thepremises secured by the mortgage, [**886] was builtwith funds other than those advanced by the plaintiff. Amodification of the building loan mortgage, datedJanuary 14, 1974, permitted the owner [*773]mortgagor to convert the two residential buildings intocondominiums.

The project has been substantially completed. Of the458 condominium units which have been constructed,approximately 285 have been conveyed, andapproximately 46 have been placed under contract but notclosed. The unrefunded down payments on these unitsaggregate approximately $ 165,000. Title to the unitsconveyed is not directly affected by this action.Subsequent to the conveyance of the 285 units,

mechanic's liens totaling approximately $ 2,500,000 werefiled against the property.

Approximately 56 defendants have been namedconsisting of: Village [***7] Mall at Hillcrest, Inc., themortgagor, which is the owner sponsor of the residentialbuildings, four individual personal guarantors, themechanic's lienors, Hillcrest Management Corp., Inc.,being the management agent designated in thecondominium offering, the Board of Managers of VillageMall at Hillcrest Condominium, managers of thecondominium, and Village Mall Terrace, Inc., acorporation to which the commercial noncondominiumbuilding was conveyed by the mortgagor. In addition, 200"John Doe" defendants, who claim or may claim byvirtue of having supplied materials, labor or otherservices, and 500 "Richard Roe" defendants, having orclaiming an interest in the mortgaged premises by virtueof being tenants or occupants, were named.

Answers in which various affirmative defenses,counterclaims and cross claims are asserted have beenserved by 15 mechanic's lienors, and theAttorney-General for the People of the State of NewYork. Except for these, no other defendants haveanswered.

A temporary receiver was appointed for the premisesnot under control of the board of managers, but with nopower to sell. A motion by the receiver to borrow $125,000 for alleged emergency repairs [***8] wasdenied on the basis that such repairs were theresponsibility of the board of managers.

The defendant, Simpson Electric Corp., one of themechanic's lienors, moves for summary judgment on theground that its mechanic's lien is prior to the lien of theplaintiff and that certain of the moneys paid back to theplaintiff on its loan be paid into court and held in trust foritself and others. The mechanic's lienor, National WallSystems, moves by separate notice, and mechanic's lienordefendants, World Carpets of N. Y. and A. WachsbergerRoofing & Sheet Metal Works, Inc., [*774] cross-movefor similar relief. Mechanic's lienor, Dic-Underhill, ajoint venture, cross-moves for similar relief and for leaveto serve an amended answer.

The Attorney-General moves by separate notice forsummary judgment declaring that the plaintiff be deniedits lien priority under the building loan contract and thatall moneys received by the plaintiff from acts in violation

Page 485 Misc. 2d 771, *; 382 N.Y.S.2d 882, **;

1976 N.Y. Misc. LEXIS 2057, ***5

of article 23-A of the General Business Law be paid intocourt and held in trust for the benefit of the contractvendees.

In addition, approximately nine other defendantmechanic's lienors have filed affidavits or affirmations[***9] with the court supporting to one degree or anothersome of the various motions and cross motions withoutthemselves moving for relief. The board of managers,which is in default in this action, has submitted anaffidavit in support of the Attorney-General's motion.

National Wall Systems, by separate notice, alsomoves for appointment of a receiver for the commercialbuilding on the grounds, inter alia, that the presentreceiver's powers do not extend to that property and thatthe $ 300,000 bond required before the receiver couldenter office has never been posted. This motion isopposed by the plaintiff who is the original ownersponsor and grantor of the commercial building, by itspresent owner and by the receiver.

All motions for summary judgment are opposed bythe plaintiff, who also opposes the appearance andassertion of claims by [**887] the Attorney-General onbehalf of the contract vendees and the public generally,on the grounds that the Attorney-General has no standingto do so in the manner pursued, and, further, that he is indefault in failing to answer within the prescribed period.

The mechanic's lienors contend that the usualpriority of the plaintiff bank's [***10] mortgage has beenlost because of certain Lien Law violations by the bankthat subordinates it to the liens of those who providedlabor and material in creating the improvements on theland.

The Attorney-General contends that the plaintiffbank has, among other statutes, violated the fulldisclosure provision of section 352-e of the GeneralBusiness Law relating to public offerings of co-operativeinterests in realty, insofar as it applies to condominiums(Real Property Law, § 339-ee), thereby misleading anddeceiving the public and violating plaintiff's duty to thePeople of the State of New York. The Attorney-General[*775] is concerned with the unrefunded down paymentsby the contract vendees to whom title has not beenconveyed, the occupants of the conveyed condominiumunits who are liable for the common charges attributableto the common elements of the property involved becauseof lack of revenue from the unconveyed units, and

concern for the public at large.

That branch of defendant Dic-Underhill's crossmotion for leave to amend its answer to add anaffirmative defense in the form annexed is granted. Saiddefendant may serve the proposed amended answerwithin 10 days [***11] after service of the order to beentered hereon.

The motion by the defendant, National WallSystems, for appointment of a receiver of the rents andprofits of the commercial building was based onerroneous information that a receiver had not beenappointed for the commercial building. In fact, under theorder of this court entered October 23, 1974, which wasmodified by the order entered November 29, 1974, areceiver had been appointed for all property notpreviously conveyed to individual condominium owners.

This receiver is empowered inter alia to lease,manage and make repairs not in excess of the sum of $15,000 and to employ a designated management agent.In addition, the parties, together with the receiver, wereordered to attempt to reach an agreement as to a plan forthe management of the property pending thedetermination of this action as well as for the sale or leaseof the unsold units subject to court approval. Thereceiver filed a $ 300,000 bond on October 30, 1974.

The movant in its attorney's reply affidavitacknowledged the appointment of the receiver butrequested that a separate receiver be appointed for thecommercial building, since under sections 13 [***12]and 22 of the Lien Law the ultimate interests in thecommercial property might be different from those of theremaining property. The court finds this to beinsufficient reason to discharge the original receiver andappoint a new and separate receiver for the commercialproperty. It would seem advisable, however, for thereceiver to maintain separate accounts for the twoparcels. Accordingly, the property subject to the powerof the receiver shall be administered by him as twoseparate entities consisting of: (1) the commercialbuilding; and (2) balance of property. All assets ofpersonalty deriving therefrom shall be kept apart and notcommingled without permission of the court, andseparate records of [*776] specific receipts andexpenditures of receivership funds shall be maintained.This motion is granted to that extent only and is in allother respects denied.

Page 585 Misc. 2d 771, *774; 382 N.Y.S.2d 882, **886;

1976 N.Y. Misc. LEXIS 2057, ***8

Prior to determination of the motion by theAttorney-General for an order denying the plaintiff's lienpriority and requiring that the plaintiff pay certainmoneys into court for the benefit of the contract vendees,it is necessary to dispose of the claim by the plaintiff thatthe Attorney-General should not be [***13] heard sincehe was in default in answering the complaint for 11months and, further, that he cannot assert affirmativedefenses because the People have been made defendantsolely to bar them from any unpaid corporate franchise[**888] taxes due, to which the affirmative defenses arenot responsive. With regard to the default in answering,the following approximate chronology of events isrecited.

The Attorney-General was served during October,1974, appeared November 27, 1974, was served withsupplemental complaint on January 16, 1975, and did notanswer until December 4, 1975. During the interveningperiod, it is not disputed that the Attorney-Generalworked diligently with about 40 of the parties in anattempt to work out a settlement. The plaintiffparticipated considerably in these efforts, there beingmany exchanges of various kinds between theAttorney-General and the plaintiff. By October, 1975settlement attempts were abandoned and motions forsummary judgment by some of the mechanic's lienorswere made. After several adjournments, the motionswere heard on December 3, 1975, at which time in opencourt with plaintiff present, the Attorney-General movedfor permission [***14] to serve an answer. A reading ofthe transcript of December 3, 1975 indicates that thoughthe plaintiff initially took issue with theAttorney-General's application, the main object of themechanic's lienors present, as well as the plaintiff, was todissuade the court from adjourning argument on themotions for summary judgment pending service of theAttorney-General's answer. Because of this, theplaintiff's counsel finally said that he had no objection togiving the Attorney-General time to "put in his papers",to which the parties could file opposing affidavits ifnecessary, but thought that that should not necessitateadjournment of argument on the motion. The courtgranted the Attorney-General's motion, ordering shortservice of the answer and the motion for summaryjudgment that the Attorney-General stated he wouldmake if his motion for permission [*777] to serve theanswer was granted. The court also adjourned argumenton the motions for summary judgment until the date thatthe Attorney-General's papers were due. However, the

Attorney-General's subsequent service of the answer andmotion for summary judgment within the time frame setby the court was returned by the [***15] plaintiff byletters of December 5 and 9, 1975 as untimely (theanswer) and not properly before the court (the motion).

The court having therefore on December 3, 1975granted the Attorney-General's motion for leave to servean answer will now consider the plaintiff's affidavit datedDecember 11, 1975 as being in the nature of a motion forreargument.

The court had considered the circumstances of thislitigation in which large numbers of families areundergoing varying economic and physical difficulties.These are the deteriorating state of the property, withpossible health and safety consequences, as well as itsdiminishing value and the necessity of the condominiumowners to bear an extra economic burden by reason of theunsold units. These circumstances, coupled with thediscussion to follow, caused the court to exercise itsdiscretion to extend the time to answer. The plaintiff hasnot shown the court that it will be prejudiced ( Corrano vCity of New York, 34 AD2d 980). In Bond Stores vTurner (262 App Div 417), an action by an employeragainst a union, the union failed to answer the complaintfor more than one year because it became enmeshed inother court actions [***16] relevant to the case at hand.The court allowed the filing of an answer, noting that thedefendant's failure to answer was not willful, out of badfaith, or that the plaintiff was not damaged because of thedelay and that the defendant's affidavit indicated that ithad a meritorious defense.

On the basis of the above, the court on December 3,1975 granted the Attorney-General's motion for leave toserve an answer. The plaintiff's request that the courtoverrule that decision is denied.

The plaintiff's argument that the Attorney-Generalwas joined only on the issue of corporate franchise taxesand that the affirmative defenses are unrelated isessentially correct. The denials are responsive but theaffirmative defenses are not connected with the complaintas it relates to the People. This is an equitable action,[**889] however, brought on by the plaintiff and is aproper one in which to invoke equitable jurisdiction. TheAttorney-General would have the authority [*778] tolitigate against the plaintiff for the alleged violations ofthe Martin Act (General Business Law, § 352-e) referableto public offerings of interests in realty and other statutes,

Page 685 Misc. 2d 771, *776; 382 N.Y.S.2d 882, **887;

1976 N.Y. Misc. LEXIS 2057, ***12

in which litigation [***17] the affirmative defenses setforth in the Attorney-General's answer would be causesof action. Also, the Attorney-General shows everydisposition that he would so litigate if cut off from thisaction. Were this to be done, all parties, including theplaintiff, would be put to considerable additional expenseand delay. The court, in the exercise of its equitablepower, determines that the affirmative defenses of theAttorney-General may remain in this action.

The Attorney-General moves for a declaration thatthe contract vendees have a claim to the mortgagedproperty superior to the lien of the plaintiff. Nothing isstated with regard to whether any of the contract vendeeshave litigated any claims they may have, whether anyjudgments have been rendered thereon, or whether any lispendens have been filed by them. The Attorney-Generalgrounds his contention as to superiority of position on thebasis of 16 alleged violations of section 22 of the LienLaw, which are the same as the bases of the mechanic'slienors' motions for summary judgment, and, in addition,on the alleged violations of section 352-e of the GeneralBusiness Law, claiming that by the plaintiff's actions it[***18] participated in a public offering of securities inrealty without making the required disclosure, onviolations of the trust fund provisions of section 71-a ofthe Lien Law and section 352-h of the General BusinessLaw requiring deposit funds coming from contractvendees to be used solely for the improvement, and onthe claim that plaintiff imposed usurious loan rates inviolation of section 5-501 of the General Obligations Lawand Federal Reserve Regulation Z (12 CFR Part 226).

None of the alleged violations of the Lien Law aresufficiently established to warrant summary judgmentdeclaring the position of the contract vendees superior tothat of the plaintiff. The main consequence of the LienLaw violations cited by the People, i.e., loss of theplaintiff's lien superiority, inures to the mechanic's lienorsrather than to the contract vendees. The allegation ofviolations by the plaintiff of the General Business Law,General Obligations Law and other statutes createsquestions of fact which may not be summarilydetermined. The motion by the Attorney-General for asummary declaration that any claims of the contractvendees [*779] against the mortgaged property involvedare [***19] superior to that of the plaintiff is denied.

Although not raised squarely, the Attorney-General'spapers indicate that he also is contending that the position

of the contract vendees is superior to that of themechanic's lienors. The applicable trust fund statuteswhich benefit contract vendees are section 352-h of theGeneral Business Law and section 71-a of the Lien Law.Under section 352-h of the General Business Law, thetrust exists until the funds are used for the construction.In this case there no longer are such funds in the hands ofthe seller, the same having been used for construction.[HN1] Section 71-a of the Lien Law provides that amechanic's lienor trust fund beneficiary is superior to thatof a contract vendee. The claim of the beneficiary of aLien Law trust (contract vendee) is "junior to that of oneholding a mechanic's lien resulting from the sameconstruction project." ( Ingalls Ironworks Co. vFehlhaber Corp., 337 F Supp 1085, 1091.) Accordingly,the request by the Attorney-General for a declaration thatthe lien of the contract vendees is superior to that of themechanic's lienors is denied.

The first branch of the mechanic's lienor defendants'motions [***20] and cross motions for summaryjudgment is based on alleged violations by the plaintiff ofsection 22 of the Lien Law which the movants contendsubordinate the plaintiff's mortgage lien to theirmechanic's liens.

Section 22 of the Lien Law, entitled "Building loancontract" provides, inter alia: [HN2] [**890] "Abuilding loan contract either with or without the sale ofland, and any modification thereof, must be in writingand duly acknowledged, and must contain a truestatement under oath, verified by the borrower, showingthe consideration paid, or to be paid, for the loandescribed therein, and showing all other expenses, if any,incurred, or to be incurred in connection therewith, andthe net sum available to the borrower for theimprovement, and, on or before the date of recording thebuilding loan mortgage made pursuant thereto, to be filedin the office of the clerk of the county in which any partof the land is situated, except that any subsequentmodification of any such building loan contract so filedmust be filed within ten days after the execution of anysuch modification. No such building loan contract or anymodification thereof shall be filed in the register's office[***21] of any county. If not so filed the interest of eachparty to such contract in the real property affected[*780] thereby, is subject to the lien and claim of aperson who shall thereafter file a notice of lien under thischapter." (Emphasis supplied.)

Page 785 Misc. 2d 771, *778; 382 N.Y.S.2d 882, **889;

1976 N.Y. Misc. LEXIS 2057, ***16

On many occasions courts have commented on thepurpose which underlies this statute. In P.T. McDermott,Inc. v Lawyers Mtge. Co. (232 NY 336, 341-342), thecourt stated "[their] object is to acquaint prospectivecontractors with the fact that they furnish labor andmaterials subject to claims prior to theirs against theproperty, so far as advances thereunder are prior to theirliens when filed (Lien Law, § 13), and also to informsuch contractors of the amounts to be advanced and thetimes of such advances." Similarly, in Rosenblum vTilden Improvement Co. (136 App Div 743, 746), thecourt commented that the following quotation from thecase of Pennsylvania Steel Co. v Title Guar. & Trust Co.(50 Misc 51, 60, affd 120 App Div 879, revd on othergrounds 193 NY 37) was a "fair statement of the purposeof the statute". The court in Pennsylvania Steel (50 Misc51, 60, supra) stated: "The statute is a safeguard [***22]against secret arrangements between lender and owner orcontractor. It commands that all agreements ormodifications thereof be filed. The object is to acquaintthe materialman with the exact amount of money to beadvanced, the purposes to which it is to be applied andthe times when or the stages of construction at whichadvances are to be made. In the terms of the agreement,is he to find a guide to his dealings with the owner orcontractor. Therefore, the agreement filed should be atrue agreement. Nothing should be left to conjecture.The materialman is not called upon to inquire beyond theactual terms of the filed instrument. The agreement is hissource of information; the statute his protection. In theevent of failure to comply with the statute, the interest inthe real property of each party to the agreement issubjected to the lien and claim of the materialmanthereafter filing his notice of lien."

Accordingly, in order to effectuate the purpose of thestatute, courts have not been reluctant in instances inwhich a building loan contract is not filed pursuant tosection 22 of the Lien Law, or where a modification ofthe building loan contract is not filed pursuant [***23] tosection 22 of the Lien Law, to make the building loancontract subordinate to a subsequently filed mechanic'slien. (See, e.g., P.T. McDermott, Inc. v Lawyers Mtge.Co., 232 NY 336, supra.)

Having stated the purpose which underlies thestatute, the [*781] question now presented is to definethe term "modification" so that it may be determinedwhether or not the changes that were made in the buildingloan contract in the case at bar were "modifications"

within the terms of section 22 of the Lien Law. [HN3]Even though the statute provides that "any subsequentmodification of any such building loan contract" must befiled, our courts have long taken the position that notevery change in the building loan contract rises to thestatus of a modification. For example, in PennsylvaniaSteel Co. v Title Guar. & Trust Co. (193 NY 37, 46,supra), the [**891] court found that an oral agreementthat some of the loan proceeds be used to pay off anexisting debt "was in no proper sense a modification ofthe written agreement between the parties, which wasfiled as required by law" and the court indicated thatsince this oral agreement "related to a mere detail of theexecution [***24] of the contract", it would not beconsidered a modification. While the basis of thatdecision has been changed because section 22 of the LienLaw now requires that a borrower's statement be filedwith a building loan contract (see, also, HNC Realty Co. vGolan Heights Developers, 79 Misc 2d 696), it is clearthat the rule still is that not every change in a buildingloan contract is equivalent to a modification within themeaning of the Lien Law. Perhaps the best discussion anddefinition of when a change in a building loan contractbecomes a modification which must be filed pursuant tosection 22 of the Lien Law is contained in the case ofNew York Sav. Bank v Wendell Apts. (41 Misc 2d 527).This was an action to foreclose a building loan mortgagewherein a mechanic's lienor moved for summaryjudgment claiming that its lien was not subject to themortgage because plaintiff failed to file a modification ofits building loan contract pursuant to section 22 of theLien Law. Plaintiff admittedly failed to file the extensionagreement within 10 days after its execution, and themechanic's lienor claimed priority over the duly recordedmortgage because of this error. The court [***25] stated(pp 529-530): "In the situation that arose in this case, aliteral reading of section 22 of the Lien Law wouldappear to give a mechanic's lienor a priority actuallydenied him under section 13 of the same law. This result,however, only obtains in the event that the extensionagreement can be construed as a modification of theoriginal building loan contract. The agreement merelyextended the date for completion of the project. It did notvary or modify any of the essential terms of the contractwith respect to the amount or manner of payment ofadvances. Consequently, the [*782] extensionaccomplished nothing contrary to the purpose for whichsection 22 was designed. The latter section is intended asa safeguard to materialmen against secret arrangementsbetween the lender and borrower. ( Rosenblum v Tilden

Page 885 Misc. 2d 771, *780; 382 N.Y.S.2d 882, **890;

1976 N.Y. Misc. LEXIS 2057, ***21

Improvement Co., 136 App. Div. 743.) The object of thestatute 'is to acquaint prospective contractors with the factthat they furnish labor and materials subject to claimsprior to theirs against the property, so far as advancesthereunder are prior to their liens when filed (Lien Law, §13), and also to inform such contractors of the amounts tobe advanced [***26] and the times of such advances.' (P.T. McDermott, Inc. v Lawyers Mtge. Co., 232 N.Y.336, 341-342.) Since the extension agreement here leftthe parties with the same rights and liabilities as existedunder the original contract it may not be interpreted as amaterial alteration thereof. No right of any person wasenlarged or restricted or impaired by the extension of thecompletion date, and the agreement of September 5,1962, is not a modification of the original loan contractwithin the purview of section 22 of the Lien Law. Themortgagee is thus entitled to priority under section 13.The motion must be denied, and summary judgmentawarded to the plaintiff."

Insight into other examples of when a change in abuilding loan contract is significant enough to beconsidered a modification may also be gained fromexamining some of the cases dealing with the filing ofbuilding loan contracts which do not comply with section22 of the Lien Law. For example, in HNC Realty Co. vGolan Heights Developers (79 Misc 2d 696, supra), alender filed a building loan contract in which heoverstated the net sum available to the borrower for theimprovement by $ 3,900,000. The court [***27] heldthat it was proper to subject it to the subordinationpenalty provided in section 22 because the misstatementwas a material [**892] defect, stating: "The falsestatement in the borrower's affidavit herein was mostmaterial and substantial" (p 702). In Ulster Sav. Bank vTotal Communities (83 Misc 2d 645), however, the courttook a different position. In that case it was held thateven though a building loan contract filed with the countyclerk's office did not disclose the use of $ 63,000 of themortgage funds to discharge the prior mortgage, therehad not been any violation of section 22 of the Lien Law.The court supported its position by stating (p 648) thatthe mechanic's lienor's secured position was not"materially affected even if funds which might have beenused to add further improvements to the real [*783]property were actually used to discharge a lien which isadmittedly superior to theirs" and that "they have notbeen prejudiced by any failure to report in the borrower'saffidavit a transaction that a brief examination of thepublic records on file in the appropriate County Clerk's

office would have revealed in any case, namely, that theprior mortgage [***28] had in fact been paid at or aboutthe time the owner of the land acquired the proceeds ofthe building loan". In the opinion of the court, thisinterpretation of the Lien Law clearly is not in themainstream of the other opinions that have beenanalyzed. Accordingly, the court holds that [HN4] wherean essential term of the building loan contract is changed,such as the amount or manner of payment, a modificationmust be filed. From the face of the statute itself, it can beseen that those terms which are required to be stated inthe building loan contract by virtue of the terms ofsection 22 of the Lien Law, should also be deemedmaterial when dealing with modifications. The termslisted in the statute are the consideration paid or to bepaid for the loan, the expenses, if any, to be incurred inconnection therewith, and the net sum available to theborrower for the improvement. Any modification dealingwith these matters is, as a matter of law, to be consideredessential.

Finally, this court deals with some of the peripheralquestions of law that are raised. It is well settled that[HN5] the statutory requirement of filing pursuant tosection 22 of the Lien Law is absolute and that a [***29]lienor's knowledge of the agreement is not a substitute forthe filing. As the court stated in P.T. McDermott, Inc. vLawyers Mtge. Co. (232 NY 336, 348, supra): "But,having failed to file the building loan agreement ofOctober 13, 1915, the appellant must suffer theconsequences. Actual knowledge of the agreement is nota substitute for the filing. 'It does not avoid such liabilityto say that the materialman knew of its provisions,although not filed. The statute absolutely andunconditionally prescribes the penalty which shall followthe failure to file such a paper.' (Hiscock, J., in Packardv. Sugarman, 31 Misc. Rep. 623, 625.) Its mortgagesmust be subordinated in point of time exactly as if in factthe liens came first and its mortgages came second. Inthat position it might have protected both itself and thelienors. It might have discharged the liens and chargedthe amounts paid for that purpose against the owner ofthe premises on account of advances." In addition, whileone court [*784] has emphasized that it would apply thepenalty of section 22 of the Lien Law where the buildingloan contract contained a materially false borrower'sstatement which [***30] is known by the lender to befalse at the time of such filing (see HNC Realty Co. vGolan Heights Developers, 79 Misc 2d 696, supra), noother court has construed the statute to require that any

Page 985 Misc. 2d 771, *782; 382 N.Y.S.2d 882, **891;

1976 N.Y. Misc. LEXIS 2057, ***25

errors be the product of knowing falsity. Thus, in UlsterSav. Bank v Total Communities (83 Misc 2d 645, 648,supra), the court stated that although the HNC Realtycase (supra) had indicated that contemporary knowledgeof falsity was required, "nothing in the statute justifiesdisparity of treatment depending upon the lender'sknowledge or lack of knowledge as to such falsity". Inthe opinion of this court, the terms of the statute and theinterpretation that has historically been made clearlyindicate that there is no requirement that any errors beknowingly made.

[**893] At bar the defendants claim that theplaintiff violated the provisions of section 22 of the LienLaw relating to the filing of the original contract byoverstating the net sum of the building loan available tothe borrower by $ 1,600,000; omitting the following: $48,000 interest charges to be paid by the borrower inconnection with the assignment of prior existingmortgages; an $ 80,000 financing [***31] commitmentfee to be paid to the lender; a $ 29,000 realty appraisalexpense; at least $ 32,000 of title examination fees; atleast $ 40,000 finder's fee for the mortgage commitment;at least $ 25,000 for real property taxes, assessment,water and sewer charges due prior to the commencementof the improvement and a $ 5,000 fee for the lender'sattorney. In addition, it is claimed that the plaintiffviolated the provisions of section 22 of the Lien Lawrequiring the filing of modifications by not filing thefollowing subsequent agreements: an agreement that thelender was to reimburse the borrower out of the loanproceeds the sum of approximately $ 855,000 forexpenditures incurred by the borrower prior to theexecution of the building loan contract; that the amountof the mortgage loan was reduced from $ 16,000,000 to $14,400,000; that the parties agreed to convert the rentalapartments to condominiums; that the lender waspermitted to apply $ 470,000 of loan proceeds toreimburse itself for unsecured commercial loans to theborrower; that the sum of $ 1,600,000, which the originalconstruction loan agreement required to be held asretainage, was reduced to $ 800,000; that the lender[***32] was to hold $ 100,000 in escrow in [*785]connection with the sale of the individual condominiumunits; that the lender consented to the borrower's transferof the property on which the commercial building waserected to another corporation controlled by theborrower's principals, thereby reducing the amount ofproperty to which the mechanic's liens could attach andthat additional financing fees of $ 400,000 would be paid

to the lender.

In the court's opinion at least two of the subsequentagreements between the plaintiff and the property ownerconstituted substantive modifications which should havebeen filed in the county clerk's office pursuant to section22 of the Lien Law. The first was the conversion of theresidential apartments from rental to individualcondominium units on January 14, 1974. Some 18months after construction had commenced, the plaintiffand the mortgagor executed a modification of thebuilding loan mortgage permitting the mortgagor to"submit the improvements to be constructed on thepremises * * * to the provisions of Article 9-B of theNew York Real Property Law (the Condominium Act)."This modification of the mortgage was recorded in theregister's [***33] office but was not filed with thecounty clerk nor was a modification of the building loancontract made or filed with the county clerk.

The plaintiff contends that the amendment inquestion is not a modification of the building loancontract in that it does not change the amount of the loan,or manner to be advanced, and that since it was recordedin the register's office, it became a public record. Theplaintiff further contends that the building loan contractincorporates the building loan mortgage by reference andthat this should alert prospective lienors to the fact thatthe register's office should be checked as well as that ofthe county clerk's office. The latter contention isanswered by the plain words of section 22 whichprovides that "No such building loan contract or anymodification thereof shall be filed at the register's officeof any county".

As to the former contention, correspondencecontained in the motion papers indicates that the decisionto convert to a condominium was the subject ofconsiderable discussion among the loan participants. Theborrower needed the lender's consent and both theplaintiff and at least one of the permanent lenderparticipants (Alison [***34] Mortgage Investment Trust)showed great concern over their interests as to thismatter. The latter required a "new cost breakdownshowing [*786] all the direct and indirect costs of suchconversion and indicating the manner in which such costsare to be financed". [**894] The conversion was amajor business decision going to the heart of thearrangement between the plaintiff and the borrower. Areading of the building loan mortgage modification of

Page 1085 Misc. 2d 771, *784; 382 N.Y.S.2d 882, **892;

1976 N.Y. Misc. LEXIS 2057, ***30

January 14, 1974 would indicate the extent to which theplaintiff was concerned with the conditions of the change.Choice by the parties of modification of the mortgage asthe sole means of effecting this change was apparentlysufficient for them, but it did not satisfy the statutory planfor apprising parties such as the mechanic's lienormovants that a change had occurred which substantiallydiluted the security upon which they were entitled to relyin the making of their business decisions concerningextension of credit to the builder. In fact, the res towhich their liens would attach that stood to safeguardtheir interest was depleted by approximately 62%,representing the approximate percentage of the value ofthe [***35] improvement that could not be reached bytheir liens because such approximate amount had beenconveyed to approximately 285 individual condominiumunit fee owners.

The building loan contract though never expresslyindicating that the improvement was intended as rentalhousing described it as: "A high-rise apartment complexconsisting of two thirteen story buildings containing atotal of 498 apartments and 14,400 square feet ofcommercial space with parking for 575 cars, located inthe southeast corner of Union Turnpike and 150th Street,Queens County, New York". The agreement is repletewith boiler-plate language suggestive of nothing else butrental. The fact that the building loan contract states thatthe lender may release portions of the mortgagedpremises from the building loan contract and the buildingloan mortgage and indicates that such release would notconstitute an amendment or modification of theagreement does not alter the consequence of the failure tofile a modification. The right of the lender to so release isnot questioned, but such provision does not relieve thelender from the necessity of modifying the building loancontract and filing such modification or [***36]modification to the building loan mortgage in theappropriate county clerk's office to reflect so overriding achange as a condominium conversion transaction. Nordoes the language of the parties to the effect that aparticular action between them shall not be deemed amodification of their basic understanding control. (Cf.City Bank [*787] Farmers Trust Co. v Slowmach RealtyCorp., 238 App Div 524.)

The court finds that the subject matter and magnitudeof the modification in question satisfies any requirementthat may exist as to the need for materiality andsubstantiality and holds as a matter of law that the

plaintiff's lien is subordinate to that of the mechanic'slienors.

The second modification which the court findsmaterial and essential concerns paragraph III of theschedule of payments provision of the original buildingloan contract which provided that:

"III. The following conditions must be complied withas conditions precedent to the final advance, which shallnot be less than 10% of the loan:

"(A) Delivery of a survey satisfactory to the lendershowing the completed improvement.

"(B) A permanent certificate of occupancy.

"(C) A Board of Fire Underwriters [***37]certificate.

"(D) Compliance with all applicable terms of thebuilding loan contract.

"(E) Purchase of the loan by the new permanentlender referred to in paragraph 38." In approximatelyMarch of 1974 the plaintiff consented to reduce the 10%retainage to 5%, even though all conditions set forth inparagraph III had not been met. The plaintiff contendsthat the building loan contract permits it to accelerate anadvance prior to becoming due and to waive anyprovision of the contract without such acceleration orwaiver being deemed to be a contract modification. In theopinion of [**895] the court [HN6] two parties to abuilding loan contract cannot agree to abrogate theprovisions of section 22 of the Lien Law to the detrimentof those for whom that section was enacted by providingthat no change in the agreement shall be deemed amodification. (Cf. City Bank Farmers Trust Co. vSlowmach Realty Corp., supra.) This is particularly thecase where such changes result in a substantialimpairment of the amount of funds available or the valueof the security. The modification of the retainageagreement reduced by $ 800,000 the amount of moneywhich the mechanic's lienors could reasonably [***38]have expected to be available at the completion of theproject. This is a substantial and material change whichcould well have been detrimental to the contractors andshould have been filed. The admitted failure [*788] todo so is sufficient to warrant summary judgmentsubordinating the plaintiff's lien to that of the mechanic'slienors.

Page 1185 Misc. 2d 771, *786; 382 N.Y.S.2d 882, **894;

1976 N.Y. Misc. LEXIS 2057, ***34

Since either one of the two violations of section 22would be sufficient to warrant the granting of summaryjudgment imposing subordination of the plaintiff's lien tothat of the mechanics, it is not necessary to discussmovants' remaining contentions in support of this branchof the motion.

The second branch of the motions by SimpsonElectric Corp., National Wall Systems and theAttorney-General, and the cross motions by thedefendants, World Carpets of N.Y., Inc., A. WachsbergerRoofing and Sheet Metal Works, Inc., and Dic-Underhill,a joint venture, pray for an order requiring payment intocourt by the plaintiff, to be held in trust for the movantsand others, of all moneys received by plaintiff directly orindirectly, in whole or in part from acts in violation of theLien Law and other laws. The plaintiff states that such anequitable [***39] remedy is not available to theAttorney-General because, inter alia, theAttorney-General has no standing on this question, nor tothe other movants whose standing is only as mechanic'slienors, a strictly statutory posture which provides for aspecific remedy, such as foreclosing on the res to whichtheir liens attach. The cases cited by the plaintiff for thisproposition essentially hold that mechanic's liens cannotequitably be established where prospective lienors havenot availed themselves of the statutory way to fix liens. (Home Fed. Sav. & Loan Assn. v Four Star Heights, 70Misc 2d 118; Billson Housing Corp. v Harrison, 26 Misc2d 675.) They do not, however, bar resort to equitablepower for the enforcement of a statutorily fixed lien if astatutory remedy exists but is insufficient in a given case.In Cerasole v Egenberger (248 App Div 587, affd 273NY 351) there was an action to foreclose plaintiff'smechanic's lien and to compel the lienor under a buildingloan agreement to pay into court an unadvanced balanceof the loan for distribution among all the mechanic'slienors on the ground that the lienor induced themechanic's lienors to continue working. [***40] Thecourt compelled payment into court despite availability ofthe statutory remedy of foreclosure to the lienors in suchcircumstances.

Equitable jurisdiction of this court, having beeninvoked by the plaintiff's mortgage foreclosure action,may now be extended for the court to hear pleas in equitymade by the movants. [HN7] Once equity is invoked thecourt may do equity as to all parties and for completerelief (20 NY Jur, Equity, § 33). [*789] Nevertheless,no basis for the aforesaid equitable relief prayed for by

any of the parties has been shown which would entitleany movant to summary judgment. As to all the movants,the grounds given by them that could be bases forequitable relief, viz., bad faith, injustice, unfairness,unconscionable conduct, violation of statutes, other thanthe violations of section 22 of the Lien Law involvecircumstances replete with triable issues that cannot besummarily decided.

As to the mechanic's lienor movants, they have notdemonstrated that the unconveyed realty units forming aconsiderable portion of the total high-rise premises wouldnot be adequate security for their liens. This isparticularly true since, by the [**896] order [***41] tobe entered hereon, their liens will be declared superior tothose of the plaintiff as to most of the realty. Thosebranches of the motions and cross motions for paymentinto court of certain moneys collected by the plaintiff asabove described are denied.

Another issue raised by the moving papers is thecounterclaim of National Wall Systems and the claim ofSimpson Electric Corp. for lien priority superior to othermechanic's lienors. Subdivision (1) of section 13 of theLien Law states as follows: [HN8] "Persons shall have nopriority on account of the time of filing their respectivenotices of liens, but all liens shall be on a parity except ashereinafter in section fifty-six of this chapter provided;and except that in all cases laborers for daily or weeklywages shall have preference over all other claimantsunder this article." [HN9] Section 56 of the Lien Lawstates that a laborer, subcontractor, or materialman isprior to the person for whom he performed the labor orfurnished materials. For example, a contractor engaginga subcontractor would be junior to his subcontractor.

In the case at bar the moving mechanic's lienors areeither contractors, subcontractors or materialmen.[***42] None have identified themselves as laborers forwages, nor have any distinguished themselves as beingwithin the preferential class of section 56 of the LienLaw. They all appear to have been performing directlyfor Village Mall at Hillcrest, Inc., the owner of the fee.The mechanic's lienor movants herein are regarded as aclass and the priorities among them are on a parity.Accordingly, the counterclaim and claim so asserted bythese movants to the extent that they maintain superiorityof lien over the other mechanic's lienors in this action arehereby dismissed.

[*790] The affidavit in support of the

Page 1285 Misc. 2d 771, *788; 382 N.Y.S.2d 882, **895;

1976 N.Y. Misc. LEXIS 2057, ***38

Attorney-General's motion for summary judgment raisesthe issue of responsibility for the common chargesapplying to the unsold units. Ordinarily, thisresponsibility would be that of the sponsor, who has nowdefaulted. The common charges for the approximately177 unsold units which are being foreclosed were, inDecember, 1975, in excess of $ 200,000 and are beingborne by the 277 unit owners. Though theAttorney-General does not expressly move to subordinatethe plaintiff's mortgage to any lien of the commoncharges, he urges that the plaintiff should at least share[***43] in the burden because, inter alia, it benefits byany protection received by the unsold units of which it, asforeclosing mortgagee, is the equitable owner.

The board of managers of Village Mall at HillcrestCondominium which served no answer in response to thecomplaint submitted affidavits in support of theAttorney-General's motion and in partial opposition to themotions of the mechanic's lienors with regard to thequestion of the standing of any lien of the commoncharges. Notwithstanding the board of managers' failureto answer the complaint, the court having invokedequitable jurisdiction in the motions before it, willconsider the question of the common charges since thistopic permeates the controversy. [HN10] Avoidance of amultiplicity of actions in circumstances where there is acommunity of interest in the subject matter and in thequestions of law and fact involved in the generalcontroversy are grounds for assumption of jurisdiction byequity (20 NY Jur, Equity, §§ 78, 79). The board ofmanagers contends that under section 339-z of the RealProperty Law, its lien is prior to all liens except those fortaxes and all sums unpaid on a first mortgage of record.It contends [***44] further that because of plaintiff'swrongdoings, the plaintiff has lost its priority over thelien of the common charges. [HN11] Section 339-aa ofthe Real Property Law states that the lien provided for insection 339-z of the Real Property Law "shall be effectivefrom and after the filing in the office of the recordingofficer". The board of managers has not established thatit perfected any lien whatever, so that insofar as sections

339-z and 339-aa of the Real Property Law areconcerned, its position is subject to the liens of themechanic's lienors. Whether plaintiff's allegedwrongdoings are sufficient to defeat the plaintiff's[**897] otherwise undisputed superiority over any lienof the common charges is not determinable summarily.Similarly, the contention made by the Attorney-Generalin his affidavit urging some sharing of the burden of thecommon [*791] charges by the plaintiff cannot bedetermined by summary judgment.

Settle order and provide therein that those branchesof the motions by defendants, Simpson Electric Corp. andNational Wall Systems, for summary judgment and thosebranches of the cross motions of World Carpets of N.Y.,Inc., A. Wachsberger Roofing & [***45] Sheet MetalWorks, Inc. and Dic-Underhill for summary judgment aregranted to the extent that the mechanic's liens of thosemovants are declared to be superior to that of theplaintiff. The entry of judgment hereon shall be stayedpending the determination of the plaintiff's action forforeclosure. That branch of the defendantDic-Underhill's motion for leave to serve an amendedanswer is granted. Defendant may serve the proposedamended answer within 10 days after service of the orderto be entered hereon. The motion by National WallSystems for the appointment of a receiver is granted tothe sole extent that the present receiver shall be directedto maintain separate accounts for the two parcels so thatthe property subject to the power of the receiver shall beadministered by him as two separate entities consistingof: (1) the commercial building; and (2) the balance ofthe property. All assets of personalty deriving therefromshall be kept apart and not commingled withoutpermission of the court, and separate records of specificreceipts and expenditures of receivership funds shall bemaintained. The motion by the Attorney-General forsummary judgment is denied. All other [***46]branches of the motions and cross motions and allrequests for relief not embodied in formal notices or crossnotices of motion are denied.

Page 1385 Misc. 2d 771, *790; 382 N.Y.S.2d 882, **896;

1976 N.Y. Misc. LEXIS 2057, ***42

Exhibit FF: HNC Realty Company v. Bay View TowerApartments Inc. 64 A.D.2d 417; 409 N.Y.S.2d 774

1 of 52 DOCUMENTS

HNC Realty Company (Known in New York State as HNC Realty Company, Inc.),Appellant-Respondent, v. Bay View Towers Apartments, Inc. et al., Defendants;

Atlas, Balogh Associates et al., Respondents; Alwinseal, Inc., Respondent-Appellant.(Action No. 1); National Wall Systems, Respondent, v. Bay View Towers

Apartments, Inc. et al., Defendants; Williamsburg Steel Products Co. et al.,Respondents; J & J Tile Company, Inc., Respondent-Appellant. (Action No. 2.)


Supreme Court of New York, Appellate Division, Second Department


November 13, 1978

PRIOR HISTORY: [***1] Cross appeals from anorder of the Supreme Court at Special Term (AngeloGraci, J.), entered July 15, 1977 in Queens County,which, inter alia, determined that the building loanmortgage of HNC Realty Co. was subordinate to the liensof certain mechanics lienors.

The Appellate Division, in an opinion by JusticeDamiani, affirmed, holding that mechanics' liens areentitled to priority as against the lien of a building loanmortgage in the application of the proceeds of aforeclosure sale where the lender and the borrowerentered into a building loan contract, duly filed, whichrequired a surety payment bond to be given by theborrower whereby subcontractors would be entitled tosue on the bond as third-party beneficiaries, but the bondthat was ultimately procured, which was not filed, gaveno right of suit to third parties, and, as such, did notcomply with the terms of the building loan contract andconstituted a material modification thereof by impairingthe rights of the subcontractors, so that either the bonditself or a memorandum expressing the substance of themodification was required to be filed with the CountyClerk (Lien Law, § 22), and the failure to file defeats[***2] the priority of the lender's mortgage lien undersection 13 of the Lien Law.

HNC Realty Co. v Bay View Towers Apts., 92 Misc2d 151. HNC Realty Co. v Bay View Towers Apts., 64AD2d .

DISPOSITION: Order of the Supreme Court, QueensCounty, entered July 15, 1977, modified, on the law, bydeleting the second decretal paragraph thereof and addingto the first decretal paragraph thereof a provision alsogranting summary judgment to defendants J & J TileCompany, Inc. and Alwinseal, Inc. As so modified, orderaffirmed, with one bill of $ 50 costs and disbursementspayable by HNC Realty Company jointly to allrespondents appearing separately and filing separatebriefs, except J & J Tile Company, Inc. and Alwinseal,Inc.

CASE SUMMARY:

PROCEDURAL POSTURE: Cross appeals were filedfrom an order of the Supreme Court at Special Term inQueens County (New York), in which partial summaryjudgment was granted in favor of mechanics lienors inforeclosure suit in which plaintiff lender sought priorityfor building loan agreements.

Page 1

OVERVIEW: The defendant borrower entered intobuilding loan mortgage agreements with the plaintifflender, in which the borrower agreed to furnish the lenderwith a surety bond guaranteeing that the borrower wouldpay its subcontractors and materialmen funds due fromthe borrower for work performed, with funds disbursedby the lender. The final loan agreements includeddifferent paragraphs concerning issuance of suretypayment bonds. Contemporaneous with the execution ofthe building loan contracts, the borrower provided thelender with a bond. Subsequently, mechanics lienors filedliens against the real property at issue. The trial courtgranted partial summary judgment in favor of themechanics lienors. On review, the court held that themechanics' liens were entitled to priority against the lienof the building loan contracts because the mechanicslienors were entitled to sue on the bond as third-partybeneficiaries, and the terms of the building loan contractsconstituted a material modification. Therefore, the failureto file the modifications in accordance with N.Y. LienLaw § 22 defeated the normal statutory priority of thebuilding loan mortgage, pursuant to N.Y. Lien Law § 13.

OUTCOME: The court affirmed partial summaryjudgment in favor of the mechanics lienors in aforeclosure action. The court reversed judgment as tocross appeals of certain mechanics lienors, subject toproof of validity of their liens at trial.

CORE TERMS: building loan, subcontractors, surety,payment bond, summary judgment, lender, modification,obligee, building loan, , borrower, material modification,contractor's, faithfully, mechanic's, technical meaning,beneficiary, materialmen, covering, lienors, usage,subcontracts, general contractor, entitled to sue,mechanics' liens, mortgage lien, apartment, failure to file,foreclosure, manifested


Contracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' LiensReal Property Law > Financing > Mortgages & OtherSecurity Instruments > Foreclosures > GeneralOverviewReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN1] N.Y. Lien Law § 13 provides that the lien of a

building loan mortgage shall be superior to mechanics'liens provided, inter alia, that the building loan contract isfiled as required by N.Y. Lien Law § 22.

Contracts Law > Contract Modifications > GeneralOverviewReal Property Law > Financing > Construction LoansReal Property Law > Financing > Mortgages & OtherSecurity Instruments > Mortgagee's Interests[HN2] N.Y. Lien Law § 22 provides that a building loancontract, and any modification thereof, must be in writingand, on or before the date of recording the building loanmortgage made pursuant thereto, must be filed in theoffice of the clerk of the county in which the land issituated. Any subsequent modification of the contractmust be filed within 10 days after the execution of suchmodification. If not so filed, the interest of each party tothe contract in the real property affected thereby issubject to the claims of persons who thereafter filemechanics' liens.

Civil Procedure > Remedies > Bonds > Sureties >LiabilityContracts Law > Types of Contracts > ConstructionContractsContracts Law > Types of Contracts > GuarantyContracts[HN3] There are two major types of bonds commonlyused in connection with private construction contracts.The first is the performance bond, in which, generally, asurety guarantees to the owner that a contractor willfaithfully perform the provisions of his contract. It givesno right of action on the part of third parties to recoverfor breach of the contractor's duty of performance. Thesecond type of bond is now commonly known as a laborand material bond, and is often called a "payment" bond,in which, generally, a surety guarantees to the owner thatthe claims of subcontractors will be paid by the generalcontractor. Subcontractors may sue to recover on thisbond notwithstanding the fact that they are not the namedobligee. Often, performance and payment bonds arecombined into one instrument.

Contracts Law > Third Parties > Beneficiaries > Claims& Enforcement[HN4] The general rule of construction to be used todetermine whether a contract was intended for the benefitof persons other than the obligee, is whether the contract

Page 264 A.D.2d 417, *; 409 N.Y.S.2d 774, **;1978 N.Y. App. Div. LEXIS 12744, ***2

shows an intent to protect such persons by agreeing to seethat they are paid; the intention of the parties manifestedin their agreement is controlling.

Civil Procedure > Summary Judgment > Opposition >General OverviewCivil Procedure > Summary Judgment > Standards >Genuine DisputesReal Property Law > Financing > Mortgages & OtherSecurity Instruments > Formalities[HN5] It is incumbent upon a party opposing a motion forsummary judgment to assemble, lay bare and reveal itsproofs to establish the existence of a genuine issue of factfor trial.

Contracts Law > Contract Interpretation > ParolEvidence > Custom & UsageEvidence > Documentary Evidence > Parol Evidence[HN6] It is a well-established rule of contractualinterpretation that words are to be given their plain andnormal meaning and that technical words are to be giventheir generally accepted technical meaning. However, theusage of the parties may vary the normal or technicalmeaning of the words and, where possible, the words ofthe contract will be given the meaning which besteffectuates the intention of the parties.

Contracts Law > Contract Interpretation > GeneralOverview[HN7] In the absence of any such extrinsic proof, inquiryas to the meaning of the contract should be confined tothe instrument itself and the meaning of technical termsas defined in current treatises on insurance or in case law.

Contracts Law > Contract Modifications > GeneralOverview[HN8] A modification of a building loan contract is"material" if it (1) alters the rights and liabilitiesotherwise existing between the parties to the agreementor (2) enlarges, restricts or impairs the rights of anythird-party beneficiary.

HEADNOTES

Suretyship and Guarantee -- Bonds

1. There are two major types of bonds commonlyused in connection with private construction contracts:

the first is the performance bond in which, generally, asurety guarantees to the owner that a contractor willfaithfully perform the provisions of his contract and itgives no right of action on the part of third parties torecover for breach of the contractor's duty ofperformance; the second type of bond is commonlyknown [***3] as a labor and material bond, often calleda "payment" bond, in which, generally, a suretyguarantees to the owner that the claims of subcontractorswill be paid by the general contractor and subcontractorsmay sue to recover on this bond notwithstanding the factthat they are not the named obligee.

Contracts -- Agreement for Benefit of ThirdParties

2. The general rule of construction to be used todetermine whether a contract was intended for the benefitof persons other than the obligee, is whether the contractshows an intent to protect such persons by agreeing to seethat they are paid and the intention of the partiesmanifested in their agreement is controlling; accordingly,the plain meaning of language in a building loan contract,which clearly stated that the party borrowing the moneywas to provide surety payment bonds "coveringsubcontractors" is that the coverage of the bond to beprovided was to extend to subcontractors and that theywould be entitled to sue thereon sue as third-partybeneficiaries.

Judgments -- Summary Judgment

3. It is incumbent upon a party opposing a motion forsummary judgment to assemble, lay bare and reveal itsproofs to [***4] establish the existence of a genuineissue of fact for trial.

Contracts -- Construction

4. The words in a contract are to be given their plainand normal meaning and technical words are to be giventheir generally accepted technical meaning; however, theusage of the parties may vary the normal or technicalmeaning of the words and, where possible, the words ofthe contract will be given the meaning which besteffectuates the intention of the parties. Parol evidence isadmissible regarding usage and custom and to define themeaning intended by the parties of a particular term usedin a contract, although in the absence of any extrinsicproof, inquiry as to the meaning of the contract should beconfined to the instrument itself and the meaning of


technical terms as defined in current treatises or in caselaw.

Contracts -- Building Loan Contract -- MaterialModification

5. A modification of a building loan contract is"material" if it alters the rights and liabilities otherwiseexisting between the parties to the agreement or enlarges,restricts or impairs the rights of any third-partybeneficiary.

Liens -- Mechanic's Lien -- Priority

6. Mechanics' [***5] liens are entitled to priority asagainst the lien of a building loan mortgage in theapplication of the proceeds of a foreclosure sale wherethe lender and the borrower entered into a building loancontract, duly filed, which required a surety paymentbond to be given by the borrower whereby subcontractorswould be entitled to sue on the bond as third-partybeneficiaries, but the bond that was ultimately procured,which was not filed, gave no right of suit to third parties,and, as such, did not comply with the terms of thebuilding loan contract and constituted a materialmodification thereof by impairing the rights of thesubcontractors, so that either the bond itself or amemorandum expressing the substance of themodification was required to be filed with the CountyClerk (Lien Law, § 22), and the failure to file defeats thepriority of the lender's mortgage lien under section 13 ofthe Lien Law.

COUNSEL: Paul, Weiss, Rifkind, Wharton & Garrison(Allan Blumstein, Joseph E. Browdy and RichardWasserman of counsel), for appellant-respondent.

LeVine, Lipton, Rosenthal & Weinstein (Norman L.Rosenthal of counsel), for Alwinseal, Inc.,respondent-appellant.

Altieri, Kushner [***6] & Miuccio (Marc L. Zoldessyof counsel), for J & J Tile Company, Inc.,respondent-appellant.

Donald Tirschwell for National Wall Systems,respondent.

Santangelo & Santangelo (Bernard B. Cohen of counsel),for Imperial Sheet Metal Works, Inc., respondent.

Golenbock & Barell (Arthur C. Silverman and Stephen

M. Rathkopf of counsel), for Williamsburg Steel ProductsCo. and another, respondents.

Amen, Weisman & Butler (Robert D. Weisman ofcounsel), for Simpson Electric Corp., respondent.

Shapiro & Brown (David Brown of counsel), for AnthonyPerri, Inc., respondent (no brief).

Sonnenfeld & Busner for Jack Brown and others,respondents (no brief).

JUDGES: Damiani, J. Hopkins, J. P., Latham andSuozzi, JJ., concur.

OPINION BY: DAMIANI

OPINION

[*419] OPINION OF THE COURT

[**776] The issue in this case is whether certainmechanics' liens are entitled to priority as against the lienof a building loan [*420] mortgage in the application ofthe proceeds of a foreclosure sale. [HN1] Section 13 ofthe Lien Law provides that the lien of a building loanmortgage shall be superior to mechanics' liens provided,inter alia, that the building loan contract [***7] is filedas required by section 22 of the Lien Law. [HN2] Section22 provides that a building loan contract, and anymodification thereof, must be in writing and, on or beforethe date of recording the building loan mortgage madepursuant thereto, must be filed in the office of the clerk ofthe county in which the land is situated. Any subsequentmodification of the contract must be filed within 10 daysafter the execution of such modification. If not so filed,the interest of each party to the contract in the realproperty affected thereby is subject to the claims ofpersons who thereafter file mechanics' liens. Here, thelender, HNC Realty Company (hereinafter HNC), and theborrower, Bay View Towers Apartments, Inc.(hereinafter Bay View), entered into a building loancontract which required a certain type of bond. Themechanics lienors contend that the bond that was givenby Bay View and accepted by HNC does not comply withthe requirements of the building loan contracts, that ittherefore constituted a material modification of thecontract and that the failure to file it in accordance withsection 22 of the Lien Law defeats the normal statutorypriority of the building loan mortgage. [***8] The


specific facts are as follows:

The instant dispute arises from the failure of amultimillion dollar project involving the construction oftwo luxury high rise [**777] apartment buildings andappurtenant facilities in the Bayside section of QueensCounty. After several preliminary financingarrangements, Bay View entered into several agreementswith HNC. The first of these was a building loan contractdated January 22, 1973. Paragraph 21 of that agreementprovided, in substance, that the principal (Bay View)would furnish the obligee (HNC) "with a surety bondguaranteeing that the Principal faithfully pay itssubcontractors and materialmen funds due from thePrincipal for work performed and materials furnished, assaid work or materials have been approved by theObligee, with the funds disbursed by the Obligee to thePrincipal for this purpose." This building loan contractwas amended by agreements dated January 22, April 16,April 17 and July 20, 1973.

Finally, a whole new financing arrangement wasworked out for a 41 million dollar building loan and anew building loan [*421] contract was prepared. Thenew loan closed, and the new building loan contract wassigned, [***9] on August 30, 1973. The record isunclear as to whether this new building loan contractsuperseded the prior contract, but it appears as though itdid.

For the purpose of this case, the crucial paragraphsof the building loan contract of August 30, 1973 arenumbers 27 and 27.8, which state:

"27. The lender has this day advanced to theborrower the sum of Nine Million Six Hundred Fifty-TwoThousand Seven Hundred Fifty-Three Dollars ($9,652,753). The borrower may, from time to time,request advances on account of the remainder of the loanfrom the lender, which requests shall be based on work inplace at the premises, and the lender, at its discretion,may honor such request and advance to the borrower theamount requested, except that, subject to all of the otherterms, covenants and conditions of this agreement, lendershall honor at least one request per month. Each suchrequest shall be made by borrowers delivering to thelender at least ten (10) days prior to the making of theadvance a fully completed and executed Request forAdvance Certificate in the form of Exhibit B annexedhereto and hereby made a part hereof, which Request forAdvance Certificate shall be [***10] dated not more

than ten (10) days prior to the date of delivery thereof tothe lender, which Request of Advance Certificate shall beaccompanied by the following * * *

"27.8 Copies of all contracts and subcontracts forthe work and materials referred to in such Request forAdvance Certificate not theretofore submitted to andapproved in writing by lender, which contracts andsubcontracts shall be in form and substance satisfactoryto, and shall be approved in writing by, lender, togetherwith surety payment bonds, issued by a surety companyor companies qualified to do business in the State of NewYork and satisfactory to lender, in which borrower shallbe the principal, covering all concrete, electrical andplumbing subcontractors under such contracts andsubcontracts, and all other subcontracts thereunder whosecontracts shall be for $ 1,000,000.00 or more, in the fullamounts of their respective contracts, and such additionalsurety payment bonds, or endorsements to bondspreviously issued, as may be necessary to cover allsubcontractors and supplies representing in the aggregatenot less than 65% of the total cost of labor and materialsincurred in the construction [***11] of [*422] bothApartment Buildings and all site improvements at theSite." (Emphasis supplied.)

It appears that paragraphs 27 and 27.8 of the August30, 1973 contract were intended to accomplish the samegoal as paragraph 21 of the January 22, 1973 buildingloan contract. In substance, they require that upon everyadvance of money by HNC to Bay View, the latter mustprovide "surety payment bonds" to the former "covering"(1) all concrete, electrical and plumbing subcontractors,(2) subcontractors whose contracts were for $ 1,000,000or more and (3) all other subcontractors representing notless than 65% of the cost of labor and [**778] materialsincurred in construction of the buildings and other siteimprovements.

Contemporaneous with the execution of the August30, 1973 building loan contract, Bay View provided HNCwith a bond. The prime issue in this case is whether thisbond complies with the requirements of paragraph 27.8of the building loan contract or is a material modificationthereof. The first whereas clause of the bond notes theexistence of the January 22, 1973 building loan contractand its amendments, wherein Bay View agreed toconstruct the apartment buildings [***12] and HNCagreed to lend the funds for construction. The secondwhereas clause notes the existence of paragraph 21 of the

Page 564 A.D.2d 417, *420; 409 N.Y.S.2d 774, **776;

1978 N.Y. App. Div. LEXIS 12744, ***8

January 22, 1973 building loan contract, which requiredBay View to furnish HNC with a surety bondguaranteeing that Bay View would faithfully pay itssubcontractors and materialmen. The third whereasclause states: "whereas, notwithstanding the condition ofParagraph 21 of said Agreement dated January 22, 1973,as amended, providing that the Principal furnish theObligee with a 'surety payment bond' to guaranteepayment of the costs of labor and material incurred in theconstruction of said buildings, the Surety agrees toguarantee that the Principal will faithfully account for thefunds disbursed by the Obligee to the Principal for thispurpose as recited in this instrument. The Obligee agreesto accept this bond as written in lieu of anythingcontained in said Agreement dated January 22, 1973, asamended, to the contrary." (Emphasis supplied.) Thebond specifically noted that it was for the benefit of HNConly and that no other party had any right nor might bringany action on it.

The building loan contract dated August 30, 1973was filed in accordance [***13] with the provisions ofsection 22 of the Lien Law. The bond was not filed.Thereafter, construction continued [*423] for about oneyear until the project failed and HNC took possession ofthe premises. Because of Bay View's default, HNCexercised its option to accelerate the due date of theprincipal debt and commenced this action to foreclose itsbuilding loan mortgage. At the same time, numeroussubcontractors and materialmen commenced an action toforeclose their liens. The foreclosure actions wereconsolidated.

On March 31, 1977 Simpson Electric Corp., one ofthe lienors, moved for summary judgment declaring thatits mechanic's lien had priority over HNC's mortgagelien. The motion was based upon the allegednoncompliance by HNC with the strict provisions ofsection 22 of the Lien Law. Simpson Electric, in itsmotion, claimed that HNC's acceptance of a bond whichdid not comply with the terms of the contract constituteda material modification of the contract and that it shouldtherefore have priority over HNC's mortgage lien.Numerous other mechanics lienors joined in SimpsonElectric's summary judgment motion.

The motion for summary judgment was opposedsolely [***14] by the affidavit of an associate of the firmrepresenting HNC. He stated simply that he had attendedthe closing of the building loan and received copies of

certain subcontracts, that thereafter he delivered thebuilding loan mortgage and building loan contract to atitle company for filing and, finally, that those documentswere subsequently returned to him with appropriatestamps indicating that they had been properly filed.

The motion for summary judgment came on to beheard before Mr. Justice Angelo Graci. He rendered anopinion holding, in substance, that the bond which wasgiven was not a "surety payment bond" as required by thecontract because, by definition, such bonds run in favorof subcontractors and materialmen whereas this bond, byits own specific terms, did not. Therefore, the acceptanceof this bond constituted a material modification of theterms of the contract, requiring that the bond be filed.Partial summary judgment was granted to the movingmechanics lienors, declaring the lien of HNC's buildingloan mortgage subordinate to their liens, subject to proofof [**779] the validity of such liens at the trial ( HNCRealty Co. v Bay View Towers Apts., 92 [***15] Misc 2d151).

HNC has appealed contending that there was nomodification of the building loan contract because thebond that was given was a "surety payment bond" andeven if it did not comply with the terms of the contract,the modification was [*424] immaterial and thereforedid not require filing under section 22 of the Lien Law.These contentions are without merit.

[HN3] There are two major types of bondscommonly used in connection with private constructioncontracts. The first is the performance bond, in which,generally, a surety guarantees to the owner that acontractor will faithfully perform the provisions of hiscontract. It gives no right of action on the part of thirdparties to recover for breach of the contractor's duty ofperformance ( Scales-Douwes Corp. v Paulaura Corp.,24 NY2d 724, 726; 17 Am Jur 2d, Contractors' Bonds, §20).

The second type of bond is now commonly known asa labor and material bond, and is often called a"payment" bond, in which, generally, a surety guaranteesto the owner that the claims of subcontractors will be paidby the general contractor. Subcontractors may sue torecover on this bond notwithstanding the fact that theyare not [***16] the named obligee ( Daniel-Morris Co. vGlens Falls Ind. Co., 308 NY 464, 468; 13 Couch,Insurance [2d ed], § 47:174 et seq.; 9 NY Jur,Contractors' Bonds, § 18). Often, performance and

Page 664 A.D.2d 417, *422; 409 N.Y.S.2d 774, **778;

1978 N.Y. App. Div. LEXIS 12744, ***12

payment bonds are combined into one instrument.

The ordinary situation in which performance orpayment bonds are used is one in which the owner of theproperty hires a general contractor for the construction,who in turn uses the services of subcontractors. Thepurpose of a "payment" bond in such a situation is toprotect the equity of the owner in his property against theclaims of unpaid subcontractors. The facts in the case atbar are substantially different. Here, the owner of theproperty, Bay View, also acted as the general contractor.The mortgagee, HNC, was the party that required a suretypayment bond.

[HN4] The general rule of construction to be used todetermine whether a contract was intended for the benefitof persons other than the obligee, is whether the contractshows an intent to protect such persons by agreeing to seethat they are paid; the intention of the parties manifestedin their agreement is controlling (13 Couch, Insurance[2d ed], § 47:193). Here, the building [***17] loancontract states very clearly that Bay View was to providesurety payment bonds "covering * * * subcontractors".(Emphasis added.) The plain meaning of this language isthat the coverage of the bond to be provided was toextend to subcontractors and that they would be entitledto sue thereon. The bond that was given does not complywith this unmistakable intent of the contract. Itspecifically states [*425] that it is for the benefit ofHNC only and it merely guarantees that Bay View will"faithfully account" for the funds disbursed pursuant tothe building loan. Thus it amounts to nothing more thanan agreement to indemnify HNC for anymisappropriation of the building loan moneys by BayView.

HNC contends, for the first time on this appeal, thatthere is a question of fact presented on the record as towhether the parties intended that subcontractors beentitled to sue upon the surety payment bond required bythe August 30, 1973 building loan agreement and thatthis question of fact is sufficient to preclude summaryjudgment.

At Special Term, however, HNC contended that theinterpretation of the building loan contract was a matterof law for the court and this is [***18] manifested by thefact that it saw fit to submit only a two-page affidavit inopposition to the motion for summary judgment. [HN5] Itis incumbent upon a party opposing a motion forsummary judgment to assemble, lay bare and reveal its

proofs to establish the existence of a genuine issue of factfor trial ( Di Sabato [**780] v Soffes, 9 AD2d 297, 301).[HN6] It is a well-established rule of contractualinterpretation that words are to be given their plain andnormal meaning and that technical words are to be giventheir generally accepted technical meaning. However, theusage of the parties may vary the normal or technicalmeaning of the words and, where possible, the words ofthe contract will be given the meaning which besteffectuates the intention of the parties (Simpson,Contracts [2d ed], § 102, p 209). Parol evidence wouldhave been admissible to introduce proof of usage andcustom and to define the meaning intended by the partiesof the term "surety payment bond" as used in the contract(see Simpson, Contracts [2d ed], § 98, p 197; § 101, pp206-208). HNC could therefore have produced affidavitsfrom, inter alia, the drafter of the contract, the personwho negotiated [***19] and signed the contract on itsbehalf, and an expert in the field of insurance, as to theusage of the parties or the technical meaning of thephrase. It did not do so. [HN7] In the absence of anysuch extrinsic proof, inquiry as to the meaning of thecontract should be confined to the instrument itself andthe meaning of technical terms as defined in currenttreatises on insurance or in case law (see, e.g., Couch,Insurance [2d ed]; 9 NY Jur, Contractors' Bonds, § 11;Contractor's Bond -- Laborers or Materialmen, Ann. 77ALR 21, 55). Read in this light, and considering all of thesurrounding circumstances, the unmistakable [*426]meaning of the contract, as stated above, is that thecoverage of the required bond was to extend to thebenefit of subcontractors, who, as third-partybeneficiaries, were to have the right to sue thereon. Thebond provided by Bay View and accepted by HNC, gaveno right of suit to third parties and thus constituted amodification of the contract.

The next question is whether such modification was"material" so as to require that it be filed pursuant tosection 22 of the Lien Law. The test was appropriatelystated by Mr. Justice Graci in Security [***20] Nat.Bank v Village Mall at Hillcrest (85 Misc 2d 771,781-782) and by Mr. Justice Lynde in New York Sav.Bank v Wendell Apts. (41 Misc 2d 527, 529); namely,[HN8] a modification of a building loan contract is"material" if it (1) alters the rights and liabilitiesotherwise existing between the parties to the agreementor (2) enlarges, restricts or impairs the rights of anythird-party beneficiary. This case comes within thesecond category. There is no question that HNC's failure

Page 764 A.D.2d 417, *424; 409 N.Y.S.2d 774, **779;

1978 N.Y. App. Div. LEXIS 12744, ***16

to exact compliance with the contract's requirement thatBay View procure a surety payment bond "covering * * *subcontractors" worked to impair the rights of thosesubcontractors. Had the required bond been given, thesubcontractors would have been paid directly by thesurety and this lawsuit would have been avoided.

Accordingly, HNC's acceptance of a bond which didnot comply with the terms of the building loan contractconstituted a material modification thereof, so that eitherthe bond itself or a memorandum expressing thesubstance of the modification was required to be filedwith the county clerk by the terms of section 22 of theLien Law, and the failure to file defeats the priority ofHNC's mortgage [***21] lien under section 13 of theLien Law.

We have considered the other contentions raised byHNC and find them to be without merit. Accordingly,

the order under review should be affirmed insofar asappealed from by HNC Realty Company. As to the crossappeals of J & J Tile Company, Inc. and Alwinseal, Inc.,the order under review should be reversed insofar asappealed from and summary judgment granted thoseparties, subject to proof of the validity of their liens at thetrial. The papers of those parties, submitted in support ofthe motions for summary judgment, sufficiently indicatedthat they were requesting the same relief as the othermechanics lienors. Although those papers were irregularin that they failed to contain a cross notice of [*427]motion for summary judgment, all the circumstances ofthis case indicate that they, too, should be awardedsummary judgment in the interest of judicial economy(see CPLR 3212, subd [b]; see, also, Peoples [**781]Sav. Bank of Yonkers, N. Y. v County Dollar Corp., 43AD2d 327, 334, affd 35 NY2d 836).

Page 864 A.D.2d 417, *426; 409 N.Y.S.2d 774, **780;

1978 N.Y. App. Div. LEXIS 12744, ***20

Exhibit GG: International Exterior Fabrications, LLC v. J.Petrocelli Contracting, Inc. et al. 2011 N.Y. Misc. Lexis 2777

1 of 50 DOCUMENTS

[**2] INTERNATIONAL EXTERIOR FABRICATIONS, LLC, Plaintiff, -against-J. PETROCELLI CONTRACTING, INC., 245 10TH AVENUE, LLC, J&A

CONCRETE CORP. DITMARS CONSTRUCTION CORP., CROSSROADSCONSTRUCTION CORP., FAST RESPONSE, INC., LIF INDUSTRIES, INC.,

DEM INTERIORS, LLC, P.I. MECHANICAL CORP., HIGHTOWERCONSTRUCTION, INC., MEGA PAINTING & DECORATING, INC.,

GREENWICH VILLAGE PLUMBERS' SUPPLY CORP., HANDRAIL DESIGN,INC., CROWNE CONSULTING, L.L.C, CITIGROUP GLOBAL MARKETS

REALTY CORP. and "JOHN DOE NO. 1" though "JOHN DOE NO. 5,"Defendants. Index No. 101679/10

101679/10

SUPREME COURT OF NEW YORK, NEW YORK COUNTY

2011 N.Y. Misc. LEXIS 2777; 2011 NY Slip Op 31545(U)

February 23, 2011, DecidedApril 11, 2011, Filed

NOTICE: THIS OPINION IS UNCORRECTED ANDWILL NOT BE PUBLISHED IN THE PRINTEDOFFICIAL REPORTS.

CORE TERMS: mortgage, building loan, loanagreement, mechanic's lien, recorded, modification, causeof action, recording, clerk's, funding, consolidated,contractor, notice, foreclosure action, condominiums,matter of law, summary judgment, securing, predecessor,Lien Law, construction project, construction loan, filingrequirement, funds available, real property, leave toamend, indebtedness, borrower, finance, newly

JUDGES: [*1] PRESENT: Alexander W. Hunter, Jr.,J.S.C.

OPINION BY: Alexander W. Hunter, Jr.

OPINION

DECISION AND ORDER

ALEXANDER W. HUNTER, JR., J:

The motion by defendant Citigroup Global MarketsRealty Corp ("Citigroup") for summary judgmentdismissing plaintiff's fourth cause of action is granted.The cross motion by plaintiff International ExteriorFabricators, LLC for (1) summary judgment establishingthat its mechanic's lien is superior to Citigroup'smortgages against the premises; (ii) amending thecomplaint to conform to the evidence reflecting that theplaintiff's mechanic's lien is superior to the Citigroupmortgages; and (iii) consolidation of the Citigroup actionwith plaintiff's action is denied in all respects.

Defendant Citigroup seeks the dismissal of plaintiff'sfourth cause of action in its complaint, which seeks toenforce plaintiff's alleged mechanic's lien.

Citigroup is the holder of two mortgages

Page 1

encumbering property at in New York, New York ("theproperty") and earlier last year it commenced a mortgageforeclosure action that is currently pending before thisCourt. The two mortgages secured loans [**3] made byCitigroup to defendant 245 10th Avenue LLC ("245"),the property owner, for [*2] the construction ofcondominiums on the property.

In this action, plaintiff, a sub-contractor whoallegedly worked on that construction project, broughtsuit to seek payment from the general contractor,defendant J. Petrocelli Contracting, Inc. ("Petrocelli") andto enforce plaintiffs purported mechanic's lien which itclaims it filed against the property.

Only the fourth cause of action asserted by plaintiffis the focus of this proceeding. In the cause of action,plaintiff claims that its mechanic's lien is superior to anyinterests or liens held by the defendants, including themortgages held by Citigroup. Specifically, plaintiffclaims that Citigroup failed to timely file its building loanagreement in violation of New York Lien Law § 22.Plaintiff alleges that Citigroup entered into "severalbuilding loan modifications," did not file them within tendays of their execution, and did not file them "on orbefore" the date Citigroup's mortgages were recorded.

Summary judgment is appropriate here. Section 22of the New York Lien Law only requires that a buildingloan agreement be filed "on or before the date ofrecording the building loan mortgage made pursuantthereto." The only exception [*3] is that any subsequentmodification to such a building loan agreement must befiled with ten days of its execution.

The filing of Citigroup's building loan agreementwas performed in compliance with New York Lien Law §22. First, there was only one building loan agreementbetween Citigroup and the borrower/owner and the loanagreement was executed on September 6, 2007, the verysame day it entered into the related building loanmortgage. Second, this building loan agreement was filedwith the New York County Clerk on December 20, 2007,many months before the related building loan mortgagewas recorded with the New York City Register onFebruary 26, 2008. Third, there were no subsequentmodifications to that loan agreement. Therefore, theten-day exception in New York Lien Law § 22 isinapplicable.

Since these facts are not disputed or denied, the

building loan agreement was properly and timely filed asa matter of law. Therefore, Citigroup's building loanmortgage is senior to plaintiff's alleged mechanic's lien.

[**4] STATEMENT OF FACTS

In the related action, Citigroup Global MarketsRealty Corp, v. 245 10th Avenue, LLC et al, No.600679/10 (Sup. Ct. N.Y. County), Citigroup is seekingto foreclose [*4] on two mortgages it holds on theproperty securing loans made to the owner of theproperty, defendant 245. Only one of these mortgages isrelevant here, that is, Citigroup's building loan mortgagedated September 26, 2007.

In 2006, defendant 245 purchased the propertyintending to construct condominiums. To finance theconstruction and marketing of the condominiums, itsought and received numerous loans. Towards that end,defendant 245 hired defendant Petrocelli to serve as thegeneral contractor for the construction of thecondominiums, and Petrocelli engaged subcontractors toperform specialized work on the project, including theplaintiff. Plaintiff alleges that it has not receivedcomplete payment for the work it claims to haveperformed on the project.

In September 2007, defendant 245 sought additionalfunding for this project. Citigroup provided project loanfinancing for marketing and other costs, and this debt wassecured with a mortgage that is not relevant to this action.In addition, Citigroup provided the owner with additionalconstruction funding. As part of that construction loanpackage, on September 26, 2007, Citigroup was assignedan existing predecessor mortgage on [*5] the property, aswell as a predecessor building loan agreement. Citigroupalso created an additional gap mortgage to secure theadditional funding provided with its building constructionloan.1

1 The history of the building loan financing isdetailed in Defendant Citigroup's complaint in itsrelated mortgage foreclosure action, which isattached as Exhibit 1 to Defendant Citigroup'sanswer in this action. That Answer is attached asExhibit B to the accompanying BerryAffirmation.

The assigned predecessor mortgage and the newlycreated gap mortgage were then consolidated to create anentirely new mortgage to secure all of the funding

Page 22011 N.Y. Misc. LEXIS 2777, *1; 2011 NY Slip Op 31545(U), **2

provided by Citigroup in its construction loan package(the "Citigroup Building Loan Mortgage"). Citigroupentered into two agreements with defendant 245 tomemorialize the terms of the new Citigroup BuildingLoan Mortgage and the new indebtedness secured by thatnew lien, namely, the parties executed (i) the Amendedand Restated Building Loan Agreement and (ii) theConsolidated, [**5] Amended and Restated BuildingLoan Mortgage and Security Agreement, each datedSeptember 26, 2007. The latter loan agreement (the"Citigroup Building Loan Agreement") is the contract[*6] that is at issue here.

Citigroup filed the Citigroup Building LoanAgreement with the New York County Clerk onDecember 20, 2007. The Citigroup Building LoanAgreement included a written and notarized statement byDefendant 245, confirming the consideration to be paidfor the loan and the net sum available to the owner. Twomonths later, the Citigroup Building Loan Mortgage wasrecorded on February 26, 2008 at the City Register, fileNo. 2008000077823, and all required taxes and chargeswere paid. The filing of the Citigroup Building LoanAgreement and the subsequent recording of the Citigroupbuilding loan mortgage are evidenced by the cover pagesfor each of these documents.

Plaintiff alleges it satisfactorily and timelyperformed the work it was hired to do by Petrocelli buthas not received full compensation. So, on November 13,2009, a year and a half after the Citigroup Building LoanMortgage was recorded, plaintiff filed a Notice ofMechanic's Lien against defendant 245 for $361,990.99.

On or about February 8, 2010, plaintiff commencedthis action to recover monies allegedly owed by Petrocelliand to enforce its mechanic's lien against the defendants.

In its complaint, plaintiff [*7] alleges that Citigroupand Defendant 245 "entered into several modifiedbuilding loan contracts ("the Building Loan Contracts")including subsequent modifications of the Building LoanContracts." Plaintiff further alleges that Citigroup did notfile these so-called "Building Loan Contracts" and theirsubsequent modifications "with the New York CountyClerk within ten days after their execution." In addition,plaintiff contends that these "Building Loan Contracts"were not filed "on or before the date of the filing of the(Citigroup Building Loan Mortgage)." Thus, plaintiffcontends that its mechanic's lien has priority over theCitigroup Building Loan Mortgage.

CONCLUSIONS OF LAW

Citigroup is entitled to summary judgment because itfiled the Citigroup Building Loan Agreement before thecorresponding Citigroup Building Loan Mortgage wasrecorded which is all the New York Lien Law§ 22requires. Summary judgment must be granted ifCitigroup establishes its "defense 'sufficiently to warranta court as a matter of law in directing judgment' [**6] in[its] favor." Zuckerman v. City of N.Y., 49 N.Y.2d 557,562, 404 N.E.2d 718, 427 N.Y.S.2d 595 (1980) (quotingN.Y. C.P.L.R. 3212(b)). Once that [*8] showing isestablished, plaintiff will have the burden of showing, inadmissible form, that "material questions of fact" exist.Id. "[M]ere conclusions, expressions of hope orunsubstantiated allegations or assertions are insufficient."Id; see also HSBC Mortgage Servs., Inc. v. Alphonso, 16Misc.3d 1131[A], 2007 NY Slip Op 51657[U], SlipCopy, 2007 WL 2429711, at *1 (N.Y. Sup. Ct., KingsCounty 2007), aff'd, 58 A.D.3d 598, 874 N.Y.S.2d 131(2d Dep't 2009) (granting summary judgment wherepriority of mortgages was in dispute).

Here, plaintiff speculates that its alleged mechanic'slien is somehow superior to the Citigroup Building LoanMortgage under the New York Lien Law. But thatspeculation is based on a misunderstanding of the factsconcerning the filing of the Citigroup Building LoanAgreement and the recording of the related CitigroupBuilding Loan Mortgage.

Section 22 of the New York Lien Law governs thepriority of liens related to building loans. See N.Y. LienLaw § 22 (2010). The purpose of the statute is toestablish a system of public notice that allows contractorsto determine the amount of funds available to finance theconstruction project and thus to pay for their services. SeeHoward Savings Bank v. Lefcon P'ship, 209 A.D.2d 473,475, 618 N.Y.S.2d 910, 913 (2d Dep't 1994).2 [*9] Thus,the statute sets forth two conditions that must be satisfiedfor a mortgage securing a building loan contract to beenforceable. See N.Y. Lien Law § 22 (2010). First, abuilding loan contract must be in writing and include,among other things, the net sum available to the borrowerfor the intended improvement. See id.3 Second, thebuilding loan contract must be filed in the County Clerk'sOffice before the related mortgage is recorded:

[**7] A building loan contract ... must... on or before the date of recording the


building loan mortgage made pursuantthereto, to be filed in the office of the clerkof the county in which any part of the landis situated, except that any subsequentmodification of any such building loancontract so filed must be filed within tendays after the execution of any suchmodification. Id. (emphasis added).

2 See also Realty Improvement Funding Co. vStillwell Gardens, Inc., 91 Misc. 2d 718, 719, 398N.Y.S.2d 480, 481 (N.Y. Sup Ct. WestchesterCounty 1977) (describing policy behindenactment of statute); New York Savings Bank v.Wendell Apartments, Inc., 41 Misc. 2d 527, 529,245 N.Y.S2d 827, 829 (N.Y. Sup. Ct. NassauCounty 1963) [*10] (internal citations omitted).3 New York Lien Law defines a "building loancontract" as "a contract whereby a ... 'lender,' inconsideration of the express promise of an ownerto make an improvement upon real property,agrees to make advances to or for the account ofsuch owner to be secured by a mortgage on suchreal property." N. Y. Lien Law § 2, subd. 13(2010).

This provision ensures that the terms of aconstruction loan are filed publicly (before the recordingof the related mortgage) to give contractors full notice ofthe funds available to pay them, and that any subsequentamendments to those terms are made public in a timelymanner. If these requirements are not met, a mechanic'slien is given priority over the mortgage securing theconstruction loan. See id; Howard Savings Bank, 209A.D.2d at 475, 618 N.Y.S.2d at 913 (holding mortgageekept priority over liens as it properly filed building loanagreement pursuant to N.Y. Lien Law § 22).

Herein, these requirements have been satisfied. TheCitigroup Building Loan Agreement was filed onDecember 20, 2007. The Citigroup Building LoanMortgage, which secures the indebtedness governed bythat loan agreement, was recorded more than two [*11]months later on February 26, 2008. Thus, the "buildingloan contract" was filed "on or before the date ofrecording" of the "building loan mortgage made pursuantthereto." N.Y. Lien Law § 22. No more was required byLien Law § 22 to ensure the priority of the CitigroupBuilding Loan Mortgage.

In its complaint, however, plaintiff contends that itsmechanic's lien is superior because the CitigroupBuilding Loan Agreement was not filed within ten daysof its execution on September 26, 2007. But that ten-dayfiling requirement has no applicability here. There is noquestion that the Citigroup Building Loan Mortgage was"made pursuant to" the Citigroup Building LoanAgreement - this mortgage was newly created to securethe additional funding governed by that loan agreement -and it was created on the same day that loan agreementwas executed. Thus, Lien Law § 22 only required theCitigroup Building Loan Agreement to be filed before theCitigroup Building Loan Mortgage was recorded whichwas done here. The ten-day filing requirement wouldonly have applied if there were subsequent modificationsto the Citigroup Building Loan Agreement, and in thiscase, there were none.

As a result, Citigroup [*12] complied with allaspects of § 22 of the New York Lien Law. Accordingly,Plaintiff's alleged mechanic's lien is junior to theCitigroup Building Loan Mortgage because the Citigroupmortgage was recorded almost two years before plaintiff's[**8] alleged lien. Plaintiff's fourth cause of actionagainst Citigroup requires dismissal as a matter of law.

The subject Project Loan Mortgage was notconsolidated with, and is entirely separate from, thesubject Building Loan Mortgage at issue. Thus, theProject Loan Mortgage retains priority over plaintiff'slien. Moreover, at the very least, the prior consolidatedmortgage of $15,224,500.83, that was later consolidatedto form the new Project Loan Mortgage, retains itspriority over plaintiff's mechanic's lien regardless of anypotential Lien Law issues.

A motion for leave to amend a complaint should bedenied where it is demonstrated that the cause of action iswithout merit (e.g., East Asiatic Co. v. Corash, 34 AD2d432, 312 N.Y.S.2d 311 [1st Dept 1970]). By virtue of allthe foregoing, there can be no question that plaintiff'sfourth cause of action, claiming priority over Citigroup'sfirst two mortgages, and to which this motion isaddressed, should be dismissed. [*13] As a result,plaintiff's request for leave to amend is denied.

By the very same token, plaintiff's related request toconsolidate its action with Citigroup's related mortgageforeclosure action is denied. Having demonstrated thenon-merit of plaintiff's claim of priority, no purpose isserved by any such consolidation. Moreover, plaintiff is


already a party in Citigroup's mortgage foreclosure actionand, as such, cannot be prejudiced.

Defendant Citigroup is directed to serve a copy ofthis order with notice of entry upon the plaintiff and theother defendants by regular and certified mail (returnreceipt not required) at their last known addresses and fileproof thereof with the clerk's office.

This decision constitutes the decision and order of

this court.

Date:New York, New York

February 23, 2011

Alexander W. Hunter, Jr.

J.S.C.


Exhibits HH: The New York Savings Bank v. WendellApartments, Inc., 245 N.Y.S. 2d 827

1 of 55 DOCUMENTS

The New York Savings Bank, Plaintiff, v. Wendell Apartments, Inc., et al.,Defendants


Supreme Court of New York, Special Term, Nassau County


October 29, 1963

CASE SUMMARY:

PROCEDURAL POSTURE: Plaintiff mortgageebrought an action to foreclose a building loan mortgagemade to defendant mortgagor. Defendant mechanic'slienor filed a motion for summary judgment, claimingthat its lien was not subject to that of the mortgageebecause of the mortgagee's failure to file a modificationof its building loan contract, pursuant to N.Y. Lien Law §22.

OVERVIEW: The date for the completion of theconstruction, under the mortgagee's building loanagreement with the mortgagor, was extended. After themortgagee filed the extension agreement, the mechanic'slienor filed its notice of lien. The court denied themechanic's lienor's summary judgment motion. At theoutset, the court noted that the extension agreement wasfiled more than 10 days after the extension agreementwas executed. The court ruled, however, that § 22, whichrequired all modifications to construction contracts to befiled within 10 days of execution or they become subjectto subsequent liens, did not apply. In so ruling, the courtfound that the extension agreement was not amodification because it did not change any of theessential elements of the loan contract, or alter the rightsand duties regarding payment. The court explained thatthe purpose of § 22 was to protect materialmen fromsecret agreements between the lender and the borrower,

and that this purpose was not served here. Because theagreement was not a modification, the court ruled that themechanic's lien was subject to the mortgage, under N.Y.Lien Law § 13(2).

OUTCOME: The court denied the mechanic's lienor'ssummary judgment motion, and struck, withoutprejudice, the mechanic's leinor's answer to the extentthat it sought to declare its lien prior in right to that of themortgagee's mortgage. The court also awarded themortgagee summary judgment.

CORE TERMS: mortgage, modification, completion,building loan, extension agreement, building loan, noticeof lien, mechanic's, recorded, covenant, lienor, movant's,loan agreement, failure to file, mechanic's lien, realproperty, essential terms, trust fund, contractors,mortgagee, modify


Contracts Law > Contract Modifications > GeneralOverviewReal Property Law > Financing > Construction LoansReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN1] N.Y. Lien Law § 22 mandates that a building loan

Page 1

contract and any modification thereof must be filed in theCounty Clerk's office on or before the date of recordingthe building loan mortgage made pursuant thereto exceptthat any subsequent modification of the contract so filedmust be filed within 10 days after its execution. Section22 further provides that if such contract is not so filed, theinterest of each party to the contract in the real propertyaffected is subject to the lien and claim of a person whoshall thereafter file a notice of lien.

Contracts Law > Types of Contracts > CovenantsReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN2] N.Y. Lien Law § 13(2) provides that everymortgage recorded subsequent to the commencement ofthe improvement and before the expiration of fourmonths after the completion thereof shall, to the extent ofadvances made before the filing of a notice of lien, havepriority over liens thereafter filed if it contains thecovenant required by subdivision three hereof.

HEADNOTES

[***1] Liens -- priority -- agreement extendingdate for completion of construction but not changingterms of building loan agreement as to amount ormanner of payment of advances is not "modification"of building loan contract within section 22 of LienLaw and failure to file such extension agreementwithin 10 days does not give subsequent mechanic'slienor priority under section 22.

A building loan contract, filed at the same time thecompanion mortgage was recorded, provided for acompletion date for the construction of August 1, 1962.By an agreement dated September 5, 1962 the completiondate was extended to November 1, 1962, but theagreement was not filed within the 10 days specified bysection 22 of the Lien Law. Such section further providesthat, if a modification is not so filed, the interest of theparties to the contract in the real property is subject to thelien of one who subsequently files a notice of lien.Section 22 is applicable only to a "modification" of thecontract and an agreement which extended the date forcompletion of the project is not a "modification" where itdid not vary or modify any of the essential terms of thecontract with respect to the amount [***2] or manner ofpayment of advances. Accordingly, plaintiff mortgageehas priority over a mechanic's lien filed on October 23,1962.

COUNSEL: Leo Malman for Milton Kaplan, Inc.,defendant.

Casimir J. P. Patrick for plaintiff.

JUDGES: Edwin R. Lynde, J.

OPINION BY: LYNDE

OPINION

[*528] [**828] In this action to foreclose abuilding loan mortgage, a mechanic's lienor (MiltonKaplan, Inc.) moves for summary judgment claiming itslien is not subject to that of the mortgage because ofplaintiff's failure to file a modification of its building loancontract pursuant to section 22 of the Lien Law.

The building loan contract and mortgage between theplaintiff and the owner of the property were bothexecuted on August 29, 1961, and the contract was filedand the mortgage recorded on September 5, 1961. Theloan agreement specified that the improvement beingfinanced was to be completed on or about August 1,1962. However, on September 5, 1962, the agreementwas modified to extend the completion date to November1, 1962. Two days after the extension agreement wassigned, the plaintiff made its last advance pursuant to thebuilding loan contract and mortgage in the sum of $34,058.85.

[***3] On October 9, 1962, the plaintiff filed theextension agreement, and on October 23, 1962, themovant filed its mechanic's lien for work allegedlyperformed and completed between June 25, 1962 andSeptember 4, 1962.

[HN1] Section 22 of the Lien Law mandates that abuilding loan contract and any modification thereof mustbe filed in the County Clerk's office on or before the dateof recording the building loan mortgage made pursuantthereto except that any subsequent modification of thecontract so filed must be filed with 10 days after itsexecution. Section 22 further provides that if suchcontract is not so filed, the interest of each [**829] partyto the contract in the real property affected is subject tothe lien and claim of a person who shall thereafter file anotice of lien.

In this case, the plaintiff admittedly failed to file theextension agreement within 10 days after its execution,

Page 241 Misc. 2d 527, *; 245 N.Y.S.2d 827, **;

1963 N.Y. Misc. LEXIS 1482, ***

and the movant claims that as a result thereof its lien byforce of statute acquires priority over the lien of theplaintiff's mortgage. This construction of the statute (LienLaw, § 22) would give a mechanic's lienor priority over aduly recorded mortgage although the notice of lien was[***4] filed subsequent to any advances [*529] madeunder the mortgage, and despite the fact that suchadvances were actually made pursuant to the terms of thebuilding loan contract as originally made and duly filed.This construction would also do violence to [HN2]section 13 of the Lien Law which provides in subdivision2 thereof that: "Every mortgage recorded subsequent tothe commencement of the improvement and before theexpiration of four months after the completion thereofshall, to the extent of advances made before the filing of anotice of lien, have priority over liens thereafter filed if itcontains the covenant required by subdivision threehereof." The covenant referred to in subdivision 3 is thecovenant by the mortgagor to receive the advances as atrust fund and to apply such advances to the payment ofthe costs of the improvements before using them for anyother purpose. The trust fund covenant, in this case, wascontained in the mortgage as well as the building loancontract.

In the situation that arose in this case, a literalreading of section 22 of the Lien Law would appear togive a mechanic's lienor a priority actually denied himunder section 13 of the same law. [***5] This result,however, only obtains in the event that the extensionagreement can be construed as a modification of theoriginal building loan contract. The agreement merely

extended the date for completion of the project. It did notvary or modify any of the essential terms of the contractwith respect to the amount or manner of payment ofadvances. Consequently, the extension accomplishednothing contrary to the purpose for which section 22 wasdesigned. The latter section is intended as a safeguard tomaterialmen against secret arrangements between thelender and borrower. ( Rosenblum v. Tilden ImprovementCo., 136 App. Div. 743.) The object of the statute "is toacquaint prospective contractors with the fact that theyfurnish labor and materials subject to claims prior totheirs against the property, so far as advances thereunderare prior to their liens when filed (Lien Law, § 13), andalso to inform such contractors of the amounts to beadvanced and the times of such advances." ( P. T.McDermott, Inc. v. Lawyers Mtge. Co., 232 N. Y. 336,341-342.) Since the extension agreement here left theparties with the same rights and liabilities [**830] asexisted [***6] under the original contract it may not beinterpreted as a material alteration thereof. No right ofany person was enlarged or restricted or impaired by theextension of the completion date, and the agreement ofSeptember 5, 1962, is not a modification of the originalloan contract within the purview of section 22 of the LienLaw. The mortgagee is thus entitled to priority undersection 13. The motion must be denied, and [*530]summary judgment awarded to the plaintiff. Themovant's answer is stricken to the extent that it seeks todeclare its lien prior in right to the plaintiff's mortgage,but without prejudice to movant's assertion of its claim insurplus money proceedings.

Page 341 Misc. 2d 527, *528; 245 N.Y.S.2d 827, **829;

1963 N.Y. Misc. LEXIS 1482, ***3

Exhibit II: Howard Savings Bank v. Lefcon Partnership 618N.Y.S. 2d 910

1 of 50 DOCUMENTS

Howard Savings Bank, Respondent, v. Lefcon Partnership, Defendant andThird-Party Plaintiff, et al., Defendants, and Mitsubishi Trust and Banking

Corporation, Respondent. E.W. Howell Co., Inc., Third-Party Defendant-Appellant.

91-07453, 92-00634

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECONDDEPARTMENT


April 19, 1994, ArguedNovember 14, 1994, Decided

PRIOR HISTORY: [***1] In an action to foreclosea mortgage, the third-party defendant E.W. Howell Co.,Inc., appeals (1) from an order of the Supreme Court,Nassau County (O'Shaughnessy, J.), entered April 18,1991, which (a) granted the motion of the plaintiffHoward Savings Bank and Mitsubishi Trust and BankingCorporation for partial summary judgment dismissing theappellant's first counterclaim and the appellant's firstcross claim, (b) denied the appellant's cross motion forsummary judgment against Howard Savings Bank andMitsubishi Trust and Banking Corporation, and (c)declared that the appellant's lien on the subject real estatewas subordinate to the mortgage lien by Howard SavingsBank and Mitsubishi Trust and Banking Corporation, and(2) as limited by its brief, from so much of an order of thesame court, entered June 28, 1991, as, upon renewal andreargument, adhered to the original determination.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellant, constructioncompany, sought review of a decision of the SupremeCourt, Nassau County (New York), which grantedappellee bank partial summary judgment declaring thatappellee's first mortgage had priority over appellant'smechanic's lien in a foreclosure action.

OVERVIEW: Appellee bank loaned a developer $67,500,000 to construct a 316-unit condominiumcomplex. Appellant, construction company, was thegeneral contractor. Appellant agreed to perform theconstruction work for $ 67,850,000. Pursuant to N.Y.Lien Law § 22, appellee and developer filed with theCounty Clerk a building loan agreement, mortgage, andother documents detailing the amount of the loan and thevarious terms of the agreement. Developer defaulted anda foreclosure action was commenced. The trial courtgranted appellee summary judgment declaring thatappellee's first mortgage had priority of appellant'smechanic's lien. The court affirmed, holding that thedisclosure adequately informed contractors as to the netsum of the building loan available for the project. Thedisclosure contemplated by the Lien Law was notintended to function as a guarantee of adequatelyfinancing.

OUTCOME: The court affirmed the partial summaryjudgment grant to appellee bank, holding that thedisclosure required by the Lien Law was not intended toguarantee adequately financing. Appellee's disclosureadequately informed contractors as to the net sum of thebuilding loan available for the project.

CORE TERMS: retainage, loan agreement,

Page 1

modification, developer, Lien Law, default, funding,contractor, mortgage, notice, summary judgment,reargument, renewal, loan proceeds, inter alia, changeorders, beneficiary, mechanic's, borrower, letter dated,personal knowledge, purportedly, conclusory,contractual, contingencies, disclosure, shortfall,possessed, lender, viable


Real Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'Liens[HN1] N.Y. Lien Law § 22 provides, in part, that abuilding loan agreement, as well as any modificationthereof, must be in writing and must show theconsideration paid for the loan, all related expensesincurred or to be incurred in connection with the loan,and the net sum available to the borrower for theimprovement. Amendments to the agreement must befiled within ten days after the execution of any suchmodification. Noncompliance with the disclosuremandate of N.Y. Lien Law § 22 results in thesubordination of the Bank's mortgage to the lienssubsequently filed by those who provided services andmaterials in connection with the project.

Contracts Law > Contract Modifications > GeneralOverviewContracts Law > Third Parties > Beneficiaries >General OverviewReal Property Law > Financing > Construction Loans[HN2] A Lien Law notice is required only with respect tomaterial modifications of the agreement. A modificationof a building loan agreement is material if it: (1) alters therights and liabilities otherwise existing between theparties to the agreement or (2) enlarges, restricts orimpairs the rights of any third party beneficiary.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN3] The disclosure contemplated by the Lien Law isnot intended to function as a guarantee that a constructionproject is adequately financed or economically viable.Nor does the Lien Law impose upon a lender a

continuing duty to apprise a contractor of the economiccondition of its borrower. Rather, it is intended to provideinformation for the benefit, inter alia, of contractors,materialmen, laborers, as to the net sum of the buildingloan available for the project.

COUNSEL: Fischbein-Badillo-Wagner, New York, N.Y.(Alan M. Gelb, Pamela A. Phillips, and Barbara Hair ofcounsel), and Goldberg, Kohn, Bell, Black Rosenbloom& Moritz, Ltd., Chicago, Ill. (Terry F. Moritz andFrederic R. Klein of counsel), for third-partydefendant-appellant (one brief filed).

Schulte [***2] Roth & Zabel, New York, N.Y. (Mark E.Kaplan of counsel), for plaintiff-respondent andadditional defendant on counterclaim respondent.

JUDGES: Thompson, J. P., Sullivan and Friedmann, JJ.,concur.

OPINION

[*473] [**912] Ordered that the appeal from theorder entered April 18, 1991, is dismissed, as that orderwas superseded by the order entered June 28, 1991, madeupon renewal and reargument; and it is further,

[*474] Ordered that the order entered June 28,1991, is affirmed insofar as appealed from; and it isfurther,

Ordered that the respondents are awarded one bill ofcosts.

The appellant E. W. Howell Construction Corp.(hereinafter Howell) served as the general contractor on aproject known as the Wyndam East and Wyndam West, a316-unit condominium complex located in Garden City.The developer, the Lefcon Partnership (hereinafterLefcon), had obtained a building construction loan whichallocated some $ 67,500,000 to the so-called "hardconstruction" costs of the project. Pursuant to Lien Law§ 22, the lender, the Howard Savings Bank (hereinafterthe Bank) and Lefcon filed with the County Clerk abuilding loan agreement, the mortgage, and various otherdocuments [***3] detailing the amount of the loan andthe various terms of the agreement, including termsrelating to the Bank's obligation to fund the project, theconditions of that obligation, and the rights and remediesavailable to both Lefcon and the Bank in connection withthe loan. Howell agreed to perform the construction


work for $ 67,850,000.

After the project encountered financial difficulties,the Bank and its loan participant, Mitsubishi Trust andBanking Corporation (hereinafter Mitsubishi), declaredLefcon to be in default in connection with the buildingloan agreement, and subsequently commenced the instantforeclosure action. Howell was named a third-partydefendant in the foreclosure action by Lefcon and laterinterposed an answer containing a "first counterclaim andcross claim" against the Bank and Mitsubishi, whichsought, inter alia, to foreclose on a mechanic's lien in anamount in excess of $ 8,200,000, the sum representinglabor and materials which Howell had supplied to theproject and for which it had received no payment.

In its pleading, Howell alleged, among other things,that the Bank violated Lien Law § 22 by filing a false andincomplete building loan agreement, [***4] andthereafter, by failing to provide written notice of allegedmodifications [**913] to that agreement. As aconsequence, Howell alleged that its lien should beaccorded priority over the Bank's first mortgage.

The Supreme Court rejected Howell's arguments,and granted partial summary judgment to the Bankdeclaring that Howell's mechanic's lien was subordinateto the Bank's first mortgage. Upon Howell's motion forreargument and renewal, the court adhered to its originaldetermination. We affirm.

[HN1] Lien Law § 22 provides, in pertinent part, thata building loan agreement, as well as any modificationthereof, must be [*475] in writing and must show theconsideration paid for the loan, all related expensesincurred or to be incurred in connection with the loan,"and the net sum available to the borrower for theimprovement". Amendments to the agreement "must befiled within ten days after the execution of any suchmodification." Noncompliance with the disclosuremandate of Lien Law § 22 results in the subordination ofthe Bank's mortgage to the liens subsequently filed bythose who provided services and materials in connectionwith the project (see, Nanuet Natl. [***5] Bank vEckerson Terrace, 47 NY2d 243).

The underlying purpose of Lien Law § 22 is topermit contractors and subcontractors to ascertain howmuch money will be made available to the owner inconnection with the project and thus, the ability of theowner to pay for any services and materials provided

(see, Nanuet Natl. Bank v Eckerson Terrace, supra; HNCRealty Co. v Bay View Towers Apts., 64 AD2d 417). ThisCourt has held that [HN2] a Lien Law notice is requiredonly with respect to "material" modifications of theagreement (see, HNC Realty Co. v Bay View TowersApts., supra, at 426). A modification of a building loanagreement is " 'material' if it: (1) alters the rights andliabilities otherwise existing between the parties to theagreement or (2) enlarges, restricts or impairs the rightsof any third party beneficiary" ( HNC Realty Co. v BayView Towers Apts., supra, at 426).

On appeal, Howell argues, inter alia, that the instantbuilding loan agreement obligated the Bank to ensure thatthe loan proceeds would "always" be sufficient tocomplete the project, and that since the Bank allegedlyknew from the inception that the project was underfundedby some $ 10,000,000, [***6] the loan agreement wasmisleading and false when filed. Howell further assertsthat, although the Bank was aware that the undisbursedloan proceeds were purportedly insufficient to completethe project, and that Lefcon was unwilling or unable tofund the shortfall, the Bank should have, but did not, filemodifications to the original loan agreement givingnotice of these occurrences. Howell also contends thatthe Bank modified the agreement without filing a LienLaw notice when it did not hold Lefcon in default onseveral occasions during the course of the project eventhough the agreement would have permitted it to do so.According to Howell, the Bank's failure to filemodifications to the agreement in light of thesedevelopments deprived it of the knowledge that therewere insufficient funds to complete the job and thus theability to make a judgment as to whether to continueworking on the project.

[*476] Contrary to Howell's suggestions, [HN3] thedisclosure contemplated by the Lien Law is not intendedto function as a guarantee that a construction project isadequately financed or economically viable. Nor does theLien Law impose upon a lender a continuing duty toapprise [***7] a contractor of the economic condition ofits borrower. Rather, it is intended to provide informationfor the benefit, inter alia, of contractors, materialmen,laborers, as to the net sum of the building loan availablefor the project (see, Nanuet Natl. Bank v EckersonTerrace, supra, 47 NY2d, at 247). That function wasperformed in this case.

Moreover, the provisions of the agreement on which

Page 3209 A.D.2d 473, *474; 618 N.Y.S.2d 910, **912;

1994 N.Y. App. Div. LEXIS 11240, ***3

Howell presently relies [**914] with respect to thefunding of the project outline rights and obligations ofLefcon and the Bank. There is nothing in the agreementwhich supports Howell's claim that it possesses the statusof a third-party beneficiary in connection with theseprovisions. To the contrary, the agreement specificallyprovides that, "[a]11 conditions to the obligations ofBank to make Advances hereunder are imposed solelyand exclusively for the benefit of Bank ... and no otherperson or entity shall have standing to require satisfactionof such conditions ... [or] be deemed to be the beneficiaryof such conditions".

In any event, the agreement does not require theBank to advance funds beyond its original loancommitment or impose the type of full funding [***8]guarantee that Howell reads into the document; nor doesit contain a representation that the project could becompleted for the loan amount--or for any particular sum.Further, the agreement does not obligate the Bank to seekadditional funding from the developer so as to make upany shortfalls which might occur, or to invoke any of itscontractual remedies in the event the developer is unableto contribute additional funds to the project. Rather, theagreement merely indicates in relevant part that the Bankwould, subject to various contingencies, make theagreed-upon loan proceeds available to Lefcon in order tofacilitate construction of the project. Indeed, theagreement fully disclosed the range of options the Bankpossessed in connection with the funding of the projectand the various contingencies under which the Bankcould terminate or suspend the making of advances. Tobe sure, the agreement confers upon the Bank variousoptions in connection with the funding of the project andalso empowers it to take certain actions in the event thedeveloper defaults in its obligations. However, theagreement does not require the Bank to exercise anyparticular option in [*477] [***9] pursuing its rightsunder the agreement. Accordingly, the Bank's decision toexercise--or to refrain from exercising--the rights itpossessed under the agreement cannot be described as amodification within the meaning of the Lien Law (cf., Inre Grossinger's Assocs., 115 Bankr 449, 452-453).

Howell's additional claim with respect to the Bank'salleged improper release of portions of the approximately$ 4,000,000 in funds which it had purportedly withheldfrom Howell's progress payments during the course of thejob is conclusory and unsubstantiated. We note that thereis nothing in Howell's pleadings which sets forth a cause

of action or alleges facts relative to the alleged release offunds retained by the Bank. Moreover, Howell submittednothing of a persuasive nature in support of the retainageclaim in opposition to the original motion for summaryjudgment and its own cross motion for summaryjudgment.

Nor was the proof submitted by Howell uponrenewal and reargument, sufficient to create materialissues of fact. The evidence submitted by Howellprincipally consisted of a post-litigation letter, datedFebruary 27, 1991, from Lefcon's chief financial officer,Irving [***10] Schoenfeld, to Lefcon's counsel, in whichSchoenfeld made an elliptical reference to a March 1989requisition for payment as "the first point at which fundsthat could have been retained by Howard were used topay for change orders".

We agree with the Supreme Court that theSchoenfeld letter, and its reference to "funds" which"could" have been retained, is lacking in evidentiaryvalue, inasmuch as it at best, "reflects the conclusoryspeculative opinion of an officer of the borrower".Schoenfeld's letter contains no indication that hisstatements were premised upon personal knowledge ofthe Bank's loan records, or, for that matter, precisely whatthe factual basis of his knowledge was. Moreover, in asubsequently filed affidavit, Schoenfeld himselfconfirmed that he lacked personal knowledge of theaccounting information, indicating instead that he wasmerely repeating statements allegedly made to him atsome unspecified date by a bank officer during atelephone conversation. Schoenfeld's description of thesetelephone conversations is not only conclusory and bereftof factual background; [**915] his affidavit contains noexplanation of where or how the Bank officer himself[***11] obtained knowledge, and what role, if any, theofficer played in connection with the management of theloan. Further, while Howell relies upon an unsignedletter dated October 11, 1989, in which a Bank officialsuggests that funds retained had been [*478] released,Mr. Schoenfeld himself specifically asserted that thisletter was a draft which was never sent to, or received by,Lefcon.

Although the foregoing alone establishes thatHowell's application for renewal and reargument withrespect to the retainage issue was properly rejected,Schoenfeld's assertions that retainage had been releasedin March 1989 were undermined by contemporaneous

Page 4209 A.D.2d 473, *476; 618 N.Y.S.2d 910, **913;

1994 N.Y. App. Div. LEXIS 11240, ***7

letters written by Lefcon's principal Lewis Feldman andSchoenfeld himself. Specifically, in a letter to the Bankdated September 25, 1989, Feldman stated that "thesimplest way to meet" Lefcon's financial needs "would beto fund these requirements from the $ 4,000,000 retainagecurrently available in the construction loan". Similarly,in a letter dated October 10, 1989, Schoenfeld himselfrequested that the Bank release its "$ 4,000,000retainage" for the same purpose. Under thecircumstances, we conclude that the Supreme Courtproperly [***12] adhered to the original determination,both in connection with the retainage claim and theadditional issues raised upon the motion.

We have reviewed Howell's remaining contentionsand find them to be without merit.

Thompson, J. P., Sullivan and Friedmann, JJ.,concur.

DISSENT BY: Ritter, J.

DISSENT

Ritter, J., Concurs in part and dissents in part andvotes to dismiss the appeal from the order entered April18, 1991, and to modify the order entered June 28, 1991,to deny summary judgment in favor of the plaintiff,Howard Savings Bank, with the following memorandum:My only disagreement with the well-reasoned analysis ofmy colleagues here concerns the majority's dispositionwith regard to the retainage issue. In my view, theconflicting evidence in the record sufficiently raises agenuine and material issue of fact; i.e., whether thedefendant, Howard Savings Bank (hereinafter the Bank)improperly disbursed retainage for the payment of changeorders, a use that is not authorized under the filedbuilding loan agreement.

The Bank's position on this key factual issue is not atall clear. Indeed, during oral argument of the variousapplications before the Supreme Court, counsel for the[***13] Bank virtually conceded that there was aquestion as to whether retainage had been released early.

Additionally, the appellant's attorneys requestedpermission to conduct further discovery, prior to a finaldisposition of the motions, contending that this wasnecessary to properly rebut the Bank's position, andsupport its own retainage claims. Although certain of the[*479] documents which purportedly support theappellant's position have little probative value standingalone, specific individuals allegedly involved in thepertinent transactions and employed by the Bank havebeen identified in the motion papers. These individualsseemingly have personal knowledge of key facts, or haveaccess to reliable information on the retainage issue, andHowell should be given the opportunity to examine themunder oath.

I further disagree with the Supreme Court'sconclusion that the Bank was, in any event, entitled torelease the retainage under the terms of the building loanagreement. The court's conclusion was based on theBank's contractual right to enter into the premises uponthe developer's default, and to use any unadvanced fundsto complete the project. Although the developer [***14]allegedly had been in default and the Bank arguablycould have taken over possession and control of theproject, it never exercised this remedy. Instead, the Bankallowed the developer to remain in possession andallegedly entered into a secret agreement modifying thebuilding loan agreement by allowing funds earmarked asretainage, and designed to secure payment for materialsand labor already provided by the appellant, to be used tofund [**916] change orders. If this alleged agreementin fact occurred, and resulted in a substantial reduction offunds which the appellant and other mechanic's lienorsreasonably expected would be available upon thecompletion of the project, I believe a supplemental filingwas mandated under Lien Law § 22 (see, Security Natl.Bank v Village Mall, 85 Misc 2d 771, 787). Under thecircumstances, I believe the appellant has asserted aviable claim that its lien is superior to the Bank's and itshould be given the opportunity to uncover facts insupport of its position which are in the exclusiveknowledge of the Bank and the developer.

Page 5209 A.D.2d 473, *478; 618 N.Y.S.2d 910, **915;

1994 N.Y. App. Div. LEXIS 11240, ***11

Exhibit JJ: Lehman Brothers Holding, Inc. V. 25 Broad,LLC 2011 NY slip op319314; 2011 NY Misc. Lexis 3543

2 of 56 DOCUMENTS

[**2] LEHMAN BROTHERS HOLDINGS, INC., Plaintiff, - against- 25 BROAD,LLC, KENT M. SWIG, MARJAM SUPPLY CO., INC., STERLING GROUP,

ALPHA INTERIORS INC., PINNACLE CONTRACTORS OF NY, INC.,SHEHADI COMMERCIAL CARPET & FLOORING, EUROPEAN

CONTRACTING GROUP LLC, SEASONS INDUSTRIAL CONTRACTINGCORP., SCOUT MECHANICAL, LLC, OLYMPIA PLUMBING & HEATING

CORP., SITE SAFETY LLC, ENVIRONMENTAL CONSULTING &MANAGEMENT SERVICES, INC., AMENDOLA MARBLE & STONE CENTER,

INC., P.C. RICHARD & SON LONG ISLAND CORP., JD SCAFFOLD INC.,COMMERCIAL FLOORING SPECIALIST, LTD. A/K/A COMMERCIAL

FLOORING SPECIALISTS, LTD., ALMAR SHEETMETAL INC., INFINITYPAINTING CO. INC., SILK AIR CORPORATION, TRADESOURCE INC., MELECONTRACTING MANAGEMENT INC., FINE CONSTRUCTION SPECIALTIESLLC, NOVA DEVELOPMENT GROUP INC, STADIUM MARBLE & TILE, INC.,LIPPOLIS ELECTRIC, INC., BENCHMARK FURNITURE MANUFACTURINGINC., ENVIRONMENTAL CONTROL BOARD OF THE CITY OF NEW YORK,NEW YORK STATE DEPARTMENT OF TAXATION & FINANCE, DOE 1-50",

"MARY ROE 1-50," "XYZ CORP. 1-50" AND "ABC, LLC 1-50", The names of the"John Doe 1-50" "MARY ROE 1-60," "XYZ CORP. 1-50" and "ABC, LLC 1-50"

Defendants being fictitious and unknown to the Plaintiff, the persons and the entitiesbeing parties having an interest in or lien against the premises sought to be

foreclosed herein, as owner, tenant, licensee, occupant or otherwise. Defendants.

100886/2009

SUPREME COURT OF NEW YORK, NEW YORK COUNTY

2011 N.Y. Misc. LEXIS 3543; 2011 NY Slip Op 31931(U)

June 13, 2011, DecidedJune 16, 2011, Filed

NOTICE: THIS OPINION IS UNCORRECTED ANDWILL NOT BE PUBLISHED IN THE PRINTEDOFFICIAL REPORTS.

PRIOR HISTORY: Nova Dev. Group, Inc. v. 25 BroadLLC, 2010 N.Y. Misc. LEXIS 4495 (N.Y. Sup. Ct., Sept.10, 2010)

CORE TERMS: mortgage, senior, building loan, loan

agreement, summary judgment, lienors, recorded,building loan, mechanic's lien, modification, mortgagedpremises, original principal amount, express promise,default judgment, real property, consolidated, declaring,mechanic's, counterclaim, foreclose, lender, promissorynote, quotation, guaranties, partial, notice, restates,surplus, amends, mortgaged property

JUDGES: [*1] Emily Jane Goodman, J.S.C.

Page 1

OPINION BY: Emily Jane Goodman

OPINION

[**3] EMILY JANE GOODMAN, JSC.:

Plaintiff Lehman Brothers Holdings, Inc. moves foran order, as mortgagee, pursuant to CPLR 3212, grantingit summary judgment against defendant mortgagor/owner25 Broad, LLC (25 Broad), giving plaintiff the right toforeclose on the mortgaged premises. Plaintiff seeksattorneys' fees in relation to this action.

Plaintiff also moves for an order, pursuant to CPLR3212, granting summary judgment against the defendantsdefined below as the Non-Challenging Lienors, declaring,pursuant to Real Property Law § 291, that the liens of theNon-Challenging Lienors are junior to plaintiff'smortgage liens, and dismissing the affirmative defensesof these defendants with respect to the foreclosure.

With respect to the Challenging Lienors, as definedbelow, plaintiff moves for an order, pursuant to CPLR3212 (e), granting it partial summary judgment declaring,pursuant to Real Property Law § 291, that the SeniorMortgage has priority over the liens of the ChallengingLienors. Plaintiff seeks to sever the remaining claims,cross claims and counterclaims of the ChallengingLienors, and also seeks to dismiss the affirmativedefenses [*2] of such defendants which challenge thevalidity of the priority of the Senior Mortgage.

Plaintiff moves, pursuant to CPLR 3215 (a), for adefault [**4] judgment against defendants StadiumMarble & Tile, Inc. (Stadium), Environmental ControlBoard of The City of New York (ECB), and New YorkState Department of Taxation & Finance (New YorkState).

Plaintiff requests a referee to ascertain and computethe amount due to plaintiff under the various mortgagedocuments, and to report on whether the mortgagedpremises can be sold in one or more parcels.

Plaintiff seeks to have the caption amended to deletedefendants John Doe 1-50, Mary Roe 1-50, XYZ Corp.1-50 and ABC, LLC 1-50 from the caption.

Seasons Industrial Contracting Corp. (Seasons)cross-moves, pursuant to CPLR 3212 (e), for an ordergranting partial summary judgment in Seasons' favor on

its first counterclaim, and declaring that Seasons'mechanic's lien has priority over plaintiff's mortgages.

BACKGROUND AND FACTUAL ALLEGATIONS

Plaintiff/Lender is seeking to foreclose on threecommercial mortgages made in connection with threecommercial loans secured by liens on real propertylocated at 25 Broad Street in New York (property). 25Broad is [*3] the mortgagor and owner of the property.Kent M. Swig (Swig) is joined as the guarantor of theloans.

Senior Mortgage:

On March 9, 2007, plaintiff entered into acommercial loan [**5] transaction (Senior Loan) with25 Broad and Swig in which 25 Broad borrowed andagreed to repay the principal sum of $231,677,693.00.Amended Complaint, ¶ 38. A loan agreement and arestated promissory note were signed which set forth theterms and conditions of the loan. Plaintiff states, the"Senior Loan was fully advanced on March 9, 2007 forthe purpose of re-financing the acquisition costs of theMortgaged Property." Slama Affirmation, ¶ 16. Theamended and restated loan agreement "amends andrestates the original senior loan mortgage which wasexecuted between plaintiff and 25 Broad Street on August23, 2005 in the amount of $231,677,693.00." Plaintiff'sExhibit A, at 5. The promissory note is a consolidation ofthe previous promissory notes secured by previousmortgages. These mortgages include the following:

A) Mortgage in the original principalamount of $7,000,000 made by 25 BroadStreet Realty Corp. to Home SavingsBank, FSB dated 5/30/96 and recorded6/19/96 ... .

***B) Mortgage in the original principal

[*4] amount of $3,865,400 made by BroadStreet LLC to The Union Labor LifeInsurance Company dated 8/14/96 andrecorded 8/20/96 ... .

***C) Building Loan Mortgage, Security

Agreement and Financing Statement in theoriginal principal amount of $42,134,600made by Broad Street LLC to The Union

Page 22011 N.Y. Misc. LEXIS 3543, *1; 2011 NY Slip Op 31931(U), **

Labor Life Insurance Company dated8/14/96 and recorded 8/20/96 ... .

1. Said mortgage C was assigned by TheUnion Labor Life Insurance Company toCredit Suisse First Boston MortgageCapital LLC by Assignment of Mortgagedated 12/23/97 and recorded 6/19/98 ... .

D) Replacement Mortgage (A) in theoriginal principal [**6] amount of$6,000,000 made by 21 West LLC toChase Federal Bank, FSB dated 7/12/96and recorded 9/6/96 ... .

***E) Replacement Mortgage (B) in the

original principal amount of $9,000,000made by 21 West LLC to Chase FederalBank, FSB dated 7/12/96 and recorded9/6/96 ... .

***F) Mortgage in the original principal

amount of $7,000,000 made by BroadStreet LLC to Credit Suisse First BostonMortgage Capital LLC dated 12/23/97 andrecorded 6/19/98 ... .

***G) Mortgage in the original principal

amount of $161,627,157.82 made by 25Broad, LLC to Lehman Brothers HoldingsInc. dated 8/23/2005 and recorded [*5]9/30/05 ... .

***1. Said mortgages A through G were

consolidated to form a single lien of$231,677,693 by Consolidation andExtension Agreement made between 25Broad, LLC and Lehman BrothersHoldings Inc. dated 8/23/2005 andrecorded 9/23/2005 ... .

Amended Complaint, Schedule 1, at 50-53.

In connection with the other Senior Loan documents,25 Broad signed and returned to plaintiff a mortgage andrelated documents (Senior Mortgage) in the sameprincipal amount of $231,677,693.00. The SeniorMortgage is a consolidation of the previous mortgages asset forth in Schedule 1 above.

On March 20, 2007, the Senior Mortgage wasrecorded in the Office of the City Register of the City ofNew York.

According to the terms of the loan agreement, the"[b]orrower shall use the proceeds of the Senior Loan torefinance the existing financing encumbering theProperty (and for no other purpose)." Plaintiff's ExhibitA, at 24. Plaintiff [**7] states that the Senior Mortgageconstitutes a first priority lien demonstratingindebtedness under the Senior Loan.

Building Mortgage:

On March 9, 2007, 25 Broad and Swig executed acommercial building loan transaction (Building Loan) bywhich 25 Broad borrowed and agreed to [*6] repayplaintiff $19,633,826.00, plus interest. A Building LoanAgreement, explaining the terms of the Building Loan,was signed and filed on March 22, 2007 with the NewYork County Clerk Records Office. According to theBuilding Loan Agreement, in pertinent part:

Borrower shall use the proceeds of theBuilding Loan to pay or reimburse itselffor Hard Costs actually incurred inconnection with the construction andrenovation of the Project Improvements ifand to the extent that such Building LoanCosts are reflected in the Building LoanBudget, subject to reallocation pursuant tothis Agreement ... ."

Plaintiff's Exhibit F, at 35.

Along with the Building Loan, plaintiff filed a noticeof lending on March 13, 2007 with the New York CountyClerk's Office. The notice of lending set forth themaximum amount allowed for improvement of theproperty as $19,633,826.00, and also identified$8,991,379.60 of the Building Loan as being advancedprior to March 9, 2007. Plaintiff's Exhibit I, at 1.

Along with the Building Loan Agreement and thepromissory note, 25 Broad, as mortgagor, executed anddelivered to plaintiff a Building Mortgage in the amountof $19,633,826.00. The [**8] Building Mortgageconsolidates, [*7] amends and restates the originalprincipal amount of $19,633,826.00 which was lent to 25Broad from plaintiff on August 23, 2005. AmendedComplaint, ¶ 60. The original building loan was recorded


on September 30, 2005 in the Office of the City Registerof the City of New York.

The Building Mortgage, along with accompanyingdocuments, was filed with the Office of the City Registerof the City of New York on March 20, 2007. Plaintifflabels the Building Mortgage as a second priority liendemonstrating the indebtedness due under the BuildingLoan Agreement. Amended Complaint, ¶ 61.

Protect Mortgage:

Also on March 9, 2007, plaintiff entered into acommercial project loan transaction (Project Loan) with25 Broad and Swig in which 25 Broad borrowed andagreed to repay the principal sum of $26,658,481.00.Amended Complaint, ¶ 71. A loan agreement and arestated promissory note were signed which set forth theterms and conditions of the loan. The promissory noteconsolidates, amends, and restates the original amount of$26,658,481.00 made by plaintiff to 25 Broad in August23, 2005 and recorded on September 30, 2005 with theOffice of the City Register of the City of New York. Id.,¶ 74.

Along [*8] with the Project Loan Agreement and thepromissory note, 25 Broad, as mortgagor, executed anddelivered to plaintiff a Project Mortgage in the amount of$26,658,481.00. The Project [**9] Mortgageconsolidates, amends and restates the original principalamount of $26,658,481.00 which was lent to 25 Broadfrom plaintiff on August 23, 2005, and recorded onSeptember 30, 2005 with the Office of the City Registerof the City of New York. Id., ¶ 77. The Project Mortgage,along with its accompanying documents, was recorded onMarch 20, 2007 with the Office of the City Register ofthe City of New York.

Plaintiff states that the Project Mortgage is a thirdpriority lien which demonstrates the indebtedness underthe Project Loan.

25 Broad defaulted on the terms of the various loandocuments, and owes plaintiff at least $270,000,000.00.

On November 25, 2009, plaintiff filed a summonsand complaint seeking to foreclose on the threecommercial mortgages made in connection with the threecommercial loans, along with other related relief.

Mechanic's Lienors

Various contractors and subcontractors providedlabor, material and/or equipment for construction on theproperty, and were not paid in full for their [*9] services.They filed mechanic's liens with the New York CountyClerk in 2008 and 2009. These mechanic's lienors werenamed as parties in the above action. Some of the lienorsserved notices of appearance and/or challenged the lienpriority of plaintiff's mortgages. Fine [**10]Construction Specialties, LLC settled with plaintiff. Adefault judgment was issued October 30, 2009 againstSite Safety, LLC, Almar Sheetmetal Inc., InfinityPackage Co. Inc., Silk Air Corporation, and Tradesource,Inc. but that judgment did not prohibit said defendantsfrom claiming a share of any surplus proceeds.

In response to plaintiff's motion, 10 mechanic'slienors have submitted opposition papers. These include:Seasons, Amendola Marble & Stone Center, Inc.(Amendola), Alpha Interiors, Inc., Commercial FlooringSpecialists, Ltd. (Commercial), Pinnacle Contractors ofNY, Inc., European Contracting Group, LLC, OlympiaPlumbing & Heating Corp., Benchmark FurnitureManufacturing Inc., Lippolis Electric, Inc. (Lippolis),Mele Contracting Management, Inc. (collectively,Challenging Lienors).1

1 Although plaintiff claims that Amendola didnot raise any challenge to the priority of plaintiff'smortgages in its answer, [*10] the recordindicates that Amendola's answer did submit achallenge to plaintiff's priority.

Seasons cross-moves, pursuant to CPLR 3212 (e),for an order granting partial summary judgment inSeasons' favor on its first counterclaim, and declaring thatSeasons' mechanic's lien has priority over plaintiff'smortgages. Seasons' counterclaim seeks to enforce its lienin the amount of $1,489,990.50, plus interest. Amendolais represented by the same counsel and joins in Seasons'motion.

[**11] All of the other Challenging Lienors exceptfor Commercial, state in their opposition papers that theyjoin in the opposition to plaintiff's motion for summaryjudgment submitted by Seasons and Amendola.

The Non-Challenging Lienors include the following:Marjam Supply Co., Inc., Sterling Group, ShehadiCommercial Carpet & Flooring, Scout Mechanical, LLC,Environmental Consulting & Management Services, Inc.,P.C. Richard & Son Long Island Corp., JD Scaffold Inc.,


and Nova Development Group, Inc.

Plaintiff argues that its Senior Mortgage has priorityover all of the other mechanic's liens since it was filed onMarch 20, 2007, which is prior to any of the other liensbeing filed. Plaintiff explicitly states that [*11] theSenior Mortgage is the only mortgage upon which itseeks to foreclose by way of this motion for partialsummary judgment, and requests that the court not decidethe issue of the priority of the Building Mortgage and theProject Mortgage. The Challenging Lienors claim that theSenior Mortgage is really a building loan contract orbuilding loan mortgage which requires additional filingspursuant to Lien Law § 22. Since plaintiff did not makethese filings, the Challenging Lienors believe that theirliens should have priority over the Senior Mortgage. TheChallenging Lienors request that the court decide thepriority of all three mortgages.

DISCUSSION

[**12] I. Summary Judgment:

"The proponent of a motion for summary judgmentmust demonstrate that there are no material issues of factin dispute, and that it is entitled to judgment as a matterof law." Dallas-Stephenson v Waisman, 39 AD3d 303,306, 833 N.Y.S.2d 89 (1st Dept 2007), citing Winegrad vNew York Univ. Med. Ctr., 64 NY2d 851, 853, 476N.E.2d 642, 487 N.Y.S.2d 316 (1985). Upon proffer ofevidence establishing a prima facie case by the movant,"the party opposing a motion for summary judgmentbears the burden of 'produc[ing] evidentiary proof inadmissible form sufficient to require [*12] a trial ofmaterial questions of fact.'" People v Grasso, 50 AD3d535, 545, 858 N.Y.S.2d 23 (1st Dept 2008), quotingZuckerman v City of New York, 49 NY2d 557, 562, 404N.E.2d 718, 427 N.Y.S.2d 595 (1980). In considering asummary judgment motion, evidence should be viewed inthe "light most favorable to the opponent of the motion."Id. at 544, citing Marine Midland Bank, N.A. v Dino &Artie's Automatic Transmission Co., 168 AD2d 610, 563N.Y.S.2d 449 (2d Dept 1990). The function of the courtis one of issue finding, not issue determination. Ferrantev American Lung Assn., 90 N.Y.2d 623, 630, 687 N.E.2d1308, 665 N.Y.S.2d 25 (1997).

Senior Mortgage:

Plaintiff argues that the Senior Mortgage is not abuilding loan contract and was properly recorded well

before any of the mechanic's lienors', thereby entitlingplaintiff to priority on its Senior Mortgage, pursuant toLien Law § 13 (1).

[**13] Seasons argues that plaintiff's "so-calledSenior Mortgage is really a building loan contract thatwas required to be filed with the New York CountyClerk's Office" pursuant to Lien Law § 222. RothmanAffirmation, ¶ 17. In addition, Seasons maintains that theSenior Mortgage is a building loan contract because anydefault in the Completion Guaranty dated March 9, 2007(executed simultaneously with the amendment [*13] andrestatement of the Senior Mortgage), such as notcompleting improvements, constitutes a default under theSenior Mortgage, and, because a promise to makeimprovements is implied in the Senior Mortgage because25 Broad would be in default under the Senior Mortgage,if it defaulted under the Building Loan Agreement. Giventhat no filing was made pursuant to Lien Law §22,Seasons maintains that its liens (as well as the othermechanic's lienors'), have priority over the SeniorMortgage.

2 At times, Seasons uses the terms building loanmortgage and building loan contractinterchangeably. A building loan mortgage ismade pursuant to a building loan contract. LienLaw § 22's filing requirement only applies to abuilding loan contract.

Seasons further argues that the Senior Mortgage is abuilding loan mortgage because it consolidates the liensof multiple mortgages from 1996, one of which was abuilding loan mortgage. Since no building loan contractwas filed, Seasons claims that its liens have priority overthe Senior Mortgage. Rothman Affirmation, ¶ 25. AsSeasons sets forth, citing to [**14] Atlantic Bank of NewYork v Forrest House Holding Co. (234 AD2d 491, 492,651 N.Y.S.2d 607 [2d Dept 1996]), where a loan [*14] ispartly a building loan and partly an acquisition loan, theentire loan is subject to the filing requirements of LienLaw § 22. Any failure to make the requisite filingssubordinates the entire loan. Id. Similarly, Commercialargues that the three 2007 mortgages were consolidatedinto one mortgage, thereby morphing them into abuilding loan contract. Although plaintiff seeks to haveCommercial's opposition and amended answer withcounterclaim rejected as untimely, Commercial's lateservice of papers does not prejudice plaintiff and isexcused.3


3 Likewise, plaintiff seeks to have Lippolis'sopposition rejected as untimely. The court acceptsLippolis's, opposition and notes that it was onlyuntimely by a matter of days.

Plaintiff maintains that these arguments have nomerit because the definition of building loan contractprecludes a finding that the Senior Mortgage is a buildingloan contract because the Senior Mortgage does notcontain any requirement that 25 Broad perform any workon the premises, and that there is no provision that thefunds were to be advanced as the work progressed.

Lien Law § 2 (14) defines a "building loanmortgage" as, "a mortgage made pursuant to a building[*15] loan contract and includes an agreement whereinand whereby a building loan mortgage is consolidatedwith existing mortgages so as to constitute one lien[**15] upon the mortgaged property."

Lien Law § 2 (13) defines a "building loan contract"as the following, in pertinent part:

a contract whereby a party thereto, inthis chapter termed "lender," inconsideration of the express promise of anowner to make an improvement upon realproperty, agrees to make advances to orfor the account of such owner to besecured by a mortgage on such realproperty, whether such advances representmoneys to be loaned or represent moneysto be paid in purchasing from or in sellingfor such owner bonds or certificatessecured by such mortgage upon such realproperty ... .

Lien Law § 22 requires the filing of the building loancontract with the New York County Clerk's Office;otherwise other liens will have priority over this contract.As summarized in Howard Savings Bank v LefconPartnership (209 AD2d 473, 474-475, 618 N.Y.S.2d 910[2d Dept 1994]), Lien Law § 22 states, in pertinent part,that a "building loan agreement, as well as anymodification thereof, must be in writing and must showthe consideration paid for the loan, [*16] all relatedexpenses incurred or to be incurred in connection withthe loan, and the net sum available to the borrower for theimprovement [internal quotation marks omitted]." Failingto comply with the filing requirements subordinates the

mortgage to the subsequently filed liens. Id.

This court is not persuaded that the plaintiff's SeniorMortgage is a really a building loan contract or a buildingloan mortgage. Contrary to Commercial's contentions, therecord indicates that plaintiff's mortgages remain threeseparate liens [**16] on the property, and were neverconsolidated.

The purpose of filing a building loan contract is to"permit contractors and subcontractors to ascertain howmuch money will be made available to the owner inconnection with the project and thus, the ability of theowner to pay for any services and materials provided."Howard Savings Bank v Lefcon Partnership, 209 AD2dat 475.

Courts have interpreted a building loan contract to be"an agreement to provide a loan for the purpose oferecting a building and to be advanced in installmentsfrom time to time as might be rendered safe by thecondition of the building [internal quotation marks andcitations omitted]." Alden State Bank v Sunrise Builders,Inc., 48 AD3d 1162, 1164, 853 N.Y.S.2d 230 (4th Dept2008).

The [*17] Senior Mortgage, as evidenced by itslanguage, does not meet the definition for a building loanmortgage or a building loan contract under the Lien Law.First and foremost, the Senior Mortgage did not advanceany funds for the purpose of making improvements to theproperty. As set forth in the loan agreement, according tothe terms of the loan agreement, the "[b]orrower shall usethe proceeds of the Senior Loan to refinance the existingfinancing encumbering the Property (and for no otherpurpose)." Exhibit A, at 24. Second, the funds wereprovided to 25 Broad in one lump sum. As plaintiffstates, the funds were fully advanced on March 9, 2007.

[**17] As the Court held in Pawling Savings Bankv Jeff Hunt Properties, Inc. (225 AD2d 678, 679, 639N.Y.S.2d 462 [2d Dept 1996]), "[a] building loanagreement is an agreement by which one undertakes toadvance another money to be used primarily in theerection of a building and not merely to pay existingmortgages and bonuses to the lender for making the loan[internal quotation marks and citation omitted]."Moreover, although the definition of building loanmortgage under Lien Law §2 (14) "includes an agreementwherein and whereby a building loan mortgage isconsolidated [*18] with existing mortgages so as to


constitute one lien upon the mortgaged property" and oneof the many mortgages which were consolidated in 2005included a building loan mortgage dated August 14,1996, the mortgage still must be made pursuant to abuilding loan contract under Lien Law §2 (14). That inturn requires "the express promise of an owner to makean improvement upon real property" under Lien Law §2(14). Here, there is no evidence of any express promise(or of a continuing promise) in the Senior Mortgage,made by the owner to improve the real property, and,presumably, all of the funds to be advanced in 1996under the building loan mortgage dated August 14, 1996,were already advanced. See Amsterdam Savings Bank vTerra Domus Corp., 97 AD2d 41, 44, 470 N.Y.S.2d 448(3d Dept 1983) (Lien Law §22 statement not required fora loan of $50,000, even though that loan wasconsolidated under one mortgage with two other loansthat [**18] advanced money for improvements, becausethere was no express promise to improve the property).This is consistent with the Court's interpretation as setforth in Atlantic Bank of New York v Forrest HouseHolding Co. (234 AD2d 491, 651 N.Y.S.2d 607, supra),the case cited to by Seasons, which [*19] penalizes thelender for "shirking" the responsibility of its Lien Law §22 filing requirements. Id. at 492. Plaintiff here did not"shirk" its responsibility to inform the contractor whatsum of money was available under the loan for theproject, since the funds advanced in the Senior Mortgagewere used for the sole and exclusive purpose ofrefinancing the existing mortgage debt and no additionalfunds were being advanced, either in 2005 or as amendedin 2007, for the purpose of improving the property. See Inre 455 CPW Associates, 192 B.R. 85, 90 (Bankr SD NY1996), affd 1999 WL 675972, 1999 US Dist. LEXIS13306 (SD NY 1999), affd 225 F3d 645 (2d Cir 2000)("itis clear from the relevant loan documents that the GreaterLoan is not a Building Loan Contract within the meaningof section 22 of the Lien Law. Moreover, the purposebehind the Lien Law statutes has not been subvertedhere"). Accordingly, the argument that the SeniorMortgage is subordinate to their liens because it is reallya building loan mortgage subject to the requirements ofLien Law §22, by virtue of the consolidation with the1996 building loan, is unpersuasive.

Likewise, Seasons' other arguments regarding theSenior [**19] Mortgage, [*20] which have not beenaddressed by plaintiff, are without merit. Seasons cites noauthority for its argument that, because the CompletionGuaranty guaranties completion of the improvements

under the Building Loan, but also guaranties otherobligations under the Senior Loan, the Guarantytransforms the Senior Mortgage into a building loancontract. Additionally, the fact that 25 Broad would be indefault under the Senior Mortgage if it defaulted underthe Building Loan Agreement does not suggest that 25Broad had an express promise to make improvements. Asthe Court held in Amsterdam Savings Bank v TerraDomus Corp. (97 AD2d at 44, supra "[a] review of thedocuments related to this transaction . . . reveals thatthere was no express promise by [Owner] to improveproperty, a promise which is required for there to be a'building loan contract.' [T]he documents . . . [are] merelya mortgage note and mortgage which contain provisionsusually associated with a permanent loan."

Seasons argues that the plaintiff's motion ispremature since there is outstanding discovery. HoweverSeasons cannot defeat summary judgment merely byclaiming a lack of discovery. Seasons, nor the otherChallenging Lienors, [*21] have not shown that any factsexist, which cannot be stated at this time, that woulddefeat summary judgment. Frierson v Concourse PlazaAssociates, 189 AD2d 609, 610, 592 N.Y.S.2d 309 (1stDept 1993), citing CPLR 3212 (f). "The mere hope ofdefendants that evidence sufficient to defeat such a[**20] motion may be uncovered during the discoveryprocess is not enough [internal quotation marks andcitation omitted]." Id. See also Amsterdam Savings Bankv Terra Domus Corp. (97 AD2d at 45), "[t]here is noevidence to show that what [defendant] is seeking mayactually exist and CPLR 3212 (subd [f]) does not permitfishing expeditions." Moreover, Seasons itself hascross-moved for summary judgment on the same issuesof lien priority.

Accordingly, as no issues of fact remain, the SeniorMortgage, being duly filed on March 20, 2007, haspriority over all of the later-filed mechanic's liens. Assuch, plaintiff is granted summary judgment declaringpriority of its Senior Mortgage to the later-filedmechanic's liens, and Seasons is denied summaryjudgment with respect to the Senior Mortgage.

Building Mortgage:4

4 Despite plaintiff's belief that the court "shouldnot waste its time and resources on thehypothetical question [*22] of priority" unlessthere are surplus proceeds from the sale of themortgaged property (Mizrahi Affirmation, ¶ 44),


there is no reason to delay decision regarding thepriority of the Building Mortgage and ProjectMortgage, as no evidence has been submitted asto the likelihood of any surplus.

Seasons argues that it and the other mechanic'slienors are entitled to priority over the Building Mortgagesince the alleged modifications have not been filed withthe New York County Clerk as required by Lien Law §22. As an example of an alleged material modification,Seasons provides a letter written on May 23, 2008, fromplaintiff to 25 Broad. The letter refers to a [**21]schedule of direct advances, which is not attached as anexhibit. The letter purportedly addresses the way that thefunds were to be disbursed. As a result, Seasons claimsthat this may impact the availability of funds to pay forthe project. Seasons also attaches other writtencorrespondence between plaintiff and 25 Broad and Swig.

Seasons also claims that it is impossible to determineif the original 2005 Building Mortgage was filed asrequired under Lien Law § 22.

Lien Law § 22 requires that any modification to thebuilding loan [*23] agreement "must be filed within tendays after the execution of any such modification." If amodification is material, the failure to file themodification entitles subsequently filed mechanic's lienspriority over the building loan mortgage. HowardSavings Bank v Lefcon Partnership, 209 AD2d at 475. Amodification is material if it either "(1) alters the rightsand liabilities otherwise existing between the parties tothe agreement or (2) enlarges, restricts or impairs therights of any third party beneficiary [internal quotationmarks and citation omitted]." Id.

Plaintiff claims that none of the letters relied on bySeasons contains any language which modifies the termsof the Building Mortgage. Plaintiff avers that the letterswere either protective advance letters, reservations ofrights letters or [**22] minutes of meetings, all of whichcontained written confirmation that no modificationswere made.

Seasons has not demonstrated that the evidencesubmitted indicates that there was a material modificationand therefore, summary judgment is denied on thisissue.5

5 Since the 2007 Building Mortgage amends andrestates all prior agreements between the parties,

it is irrelevant if a building [*24] loan agreementwas filed in 2005. Plaintiff filed a Building LoanAgreement with the New York County Clerk'sOffice in 2007, which was prior to the filing ofthe mechanic's liens.

Project Mortgage:

Seasons argues that its mechanic's liens should havepriority over the Project Mortgage since plaintiff's ProjectLoan Agreement is really a building loan agreement,subject to additional filing requirements which were notmade with the New York County Clerk because the termstherein provide for payments in consideration for makingimprovements.

Seasons points to section 2.8.3 of the Project LoanAgreement (among other sections) which states inpertinent part:

2.8.3 Conditions of Final ConstructionAdvance. (d) Payment of Costs: Evidencesatisfactory to Lender that all sums due inconnection with the construction of theProject Improvements have been paid infull (or will be paid out of the fundsrequested to be advanced) and that noparty claims or has a right to claim anystatutory or common law lien arising outof the construction of the ProjectImprovements or the supplying of labor,material, and/or services in connectiontherewith.

Plaintiff's Exhibit J, at 53.

[**23] Project Improvements are [*25] defined inthe Project Loan Agreement as "the renovation andconstruction work shown on the Plans and Specifications,as the same will be constructed in all material respects inaccordance with the Plans and Specifications and allLegal Requirements." Id. at 22.

Plaintiff claims that the proceeds of the ProjectMortgage were for related project costs that were notcosts of the improvement on the Mortgaged Premisesbased on its attorney's statement. Slama Affirmation, ¶ 8.Plaintiff also contends that the Project Mortgage has noexpress promise to improve the property, and points to atreatise that defines a project loan mortgage as one thatsecures advances for "development-related costs" that do


not pay for improvements (Reply Mem at 20). Seasonspoints out that the definition of building loan contractunder Lien Law §2 (13) does not distinguish between"hard costs" and "soft costs" as the only relevant criteriais whether money is advanced in consideration of anexpress promise of an owner to make "an improvementupon real property."

The court finds that Seasons has properly pled thatthe Project Mortgage is really a building loan contract.Even if not labeled a building loan contract, [*26] theProject Mortgage can still be denominated as a buildingloan contract if it meets the Lien Law's requirements of abuilding loan. See Lincoln First Bank, N.A. v SpauldingBakeries, Inc., 117 Misc 2d 892, 459 N.Y.S.2d 696 (SupCt, Broome [**24] County 1983). Plaintiff avers thatthe proceeds for the project mortgage were not to be usedfor improvement of the mortgaged premises but were tobe used for other projects. However, plaintiff provides noevidence as to what these projects were.

As previously mentioned, Lien Law § 2 (13) definesa "building loan contract" as one where the lender agreesto advance money to the owner in consideration formaking improvements to the property. Improvements aredefined under Lien Law §2 (4). There can be no disputethat the Project Loan Agreement provides for loanpayments, in consideration of making improvements tothe property, as that term is used under the Lien Law.Accordingly, the Project Loan Agreement is a buildingloan contract, and, because it was not filed with the NewYork County Clerk, the Project Mortgage is subordinateto the mechanic's liens.

Seasons and the other Challenging Lienors aregranted summary judgment with respect to the priority oftheir liens [*27] over the plaintiff's Project Mortgage.

Summary Judgment on the Foreclosure Action:

Plaintiff seeks to foreclose on the mortgagedpremises to recover debt due under the three loans. 25Broad admits that it defaulted on the loans and consentsto summary judgment being granted in plaintiff's favor.Swig affirms this information. Accordingly, plaintiff isgranted summary judgment with respect [**25] toforeclosing on the mortgaged premises. However, as aresult of this decision, plaintiff is only granted summaryjudgment foreclosing on the Senior Mortgage and theBuilding Mortgage.

Plaintiff is entitled to recover reasonable attorneys'fees pursuant to the loan documents. See e.g. Plaintiff'sExhibit 1-C, at 7.1 (h)(vii).

A referee shall be appointed to examine and reporton how the parcel should be sold and to ascertain theamounts due to the plaintiff under the Senior andBuilding Loan documents.

Plaintiff's Request for Default Judgment Against ECB,New York Site arid Stadium:

Plaintiff has served ECB, New York State andStadium with the complaint. None of these parties hasanswered the complaint, nor have they sought additionaltime to do so. Plaintiff requests that a default judgment beentered [*28] against these defendants declaring that anyof these defendants' interest is junior to plaintiff'smortgage liens and that they are barred from any share ofthe mortgaged premises but are not barred from anysurplus proceeds, if any.

Since Stadium has failed to answer the complaint orappear and plaintiff has demonstrated a prima facie casethat Stadium's mechanics lien is junior to the SeniorMortgage, a default judgment is granted against Stadium,but it is not prohibited from sharing in any surplus.However, a default judgment is [**26] denied againstECB and New York State because plaintiff has not madeany effort to demonstrate that the Senior Mortgage issuperior to these liens (including what appears to be a taxlien on the property).

Various Other Relief:

Seasons argues that plaintiff's motion should bedenied because plaintiff did not attach copies of itsreplies to Seasons' and some other defendants'counterclaims to the motion. The court is not persuadedby this argument. Plaintiff has cured any potential allegeddefects in its pleadings and this alleged defect has notprejudiced the defendants in any way. See CPLR 2001("[a]t any stage of an action, including the filing of asummons [*29] with notice, summons and complaint orpetition to commence an action, the court may permit amistake, omission, defect or irregularity . . . if asubstantial right of a party is not prejudiced . . .").

Since plaintiff has ascertained that no other parties,other than the defendants served, have an interest in theproperty, the caption is amended to delete defendants


John Doe 1-50, Mary Roe 1-50, XYZ Corp. 1-50 andABC, LLC 1-50.

CONCLUSION

Accordingly, the foreclosure motion for summaryjudgment brought by plaintiff is granted to the extent ofallowing plaintiff to foreclose on the mortgaged premisesas set forth in [**27] the decision, granting reasonableattorneys' fees in connection with this action, andappointing a referee to compute the amount due forprincipal and interest and to determine if the mortgagedpremises can be sold in one or more parcels, as well as todetermine the amount of attorneys' fees owed.

Plaintiff's motion for partial summary judgment,declaring, pursuant to Real Property Law § 291, that theSenior Mortgage has priority over the liens of theChallenging and Non-Challenging Lienors, is granted inits entirety.

Seasons and the other Challenging Lienors aredenied summary [*30] judgment with respect to the

priority of their liens over the Building Mortgage and aregranted summary judgment with respect to the priority oftheir liens over the Project Mortgage.

A default judgment against defendants StadiumMarble & Tile is granted as described herein but is deniedas to Environmental Control Board of The City of NewYork and New York State Department of Taxation &Finance.

The caption is amended to delete defendants JohnDoe 1-50, Mary Roe 1-50, XYZ Corp. 1-50 and ABC,LLC 1-50.

Submit proposed Order on Notice.

This Constitutes the Decision and Order of the Court.

Dated: June 13, 2011

ENTER

J.S.C


Exhibit KK: Yankee Bank for Finance and Savings, FSB v.Task Associates et al. 731 F. Supp. 64

Exhibit LL: Atlantic Bank of New York v. Forrest HouseHolding Company et al. 651 N.Y.S. 2d 607

(Note: Not followed by Court of Appeals in Altshuler ShahamProvident Fund, Ltd v. GML Tower LLC 21 N.Y.3d 352, ExhibitMM herein)

1 of 52 DOCUMENTS

Atlantic Bank of New York, Appellant, v. Forrest House Holding Company et al.,Defendant, and Atlas Building Systems, Inc., et al., Respondents.

95-09873

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECONDDEPARTMENT


November 22, 1996, ArguedDecember 23, 1996, Decided

PRIOR HISTORY: [***1] In a mortgageforeclosure action, the plaintiff appeals, as limited by itsbrief, from so much of an order of the Supreme Court,Queens County (LeVine, J.), dated September 13, 1995,as denied that branch of its motion which was for partialsummary judgment against the defendants Atlas BuildingSystems, Inc.; Teman Electrical Contracting, Inc.;Valente Industries, Inc.; Skyline Steel Corp.;Super-Structures, Inc.; McNally & McNally, Inc.;De-Con Mechanical Contractors, Inc.; Howard Z. Lieb &Company, Inc.; and JMR Concrete of Long Island Corp.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellant bank soughtreview of an order of the Supreme Court, Queens County(New York), which denied its motion for partial summaryjudgment against respondents, mechanic's lien holders, inthe bank's foreclosure action.

OVERVIEW: The bank contended that the amount of itsmortgage that secured loan proceeds apportioned for thepurchase of property was outside the scope of N.Y. LienLaw § 22, which made an unfiled mortgage subject tofiled liens, and therefore they were entitled to partialsummary judgment. The court found that partial summaryjudgment was properly denied. The court held that thesubordination provision of the statute applied to building

loan contracts with or without the sale of land. The courtfound that applying a liberal construction of the languagewas consistent with the overriding concern that the lenderwas the party responsible for compliance and that thethreat of losing priority was an effective deterrent againstlenders shirking responsibility. The court found thatsummary judgment was properly denied.

OUTCOME: The court affirmed the order of the lowercourt with costs.

CORE TERMS: mechanic's liens, mortgage, summaryjudgment, lender, loan proceeds, building loan, sale ofland


Commercial Law (UCC) > Secured Transactions(Article 9) > Priority > General OverviewReal Property Law > Financing > Construction LoansReal Property Law > Purchase & Sale > Contracts ofSale > Formalities[HN1] Pursuant to N.Y. Lien Law § 22, a building loancontract, with or without the sale of land, and anymodification thereto, must be in writing and must be filedwith the county clerk of the county in which any part of

Page 1

the land is situated. If not so filed the interest of eachparty to such contract in the real property is subject to thelien and claim of a person who shall thereafter file anotice of lien under this chapter.

Commercial Law (UCC) > Secured Transactions(Article 9) > Priority > General OverviewReal Property Law > Financing > Construction LoansReal Property Law > Nonmortgage Liens > LienPriorities[HN2] The subordination provision of N.Y. Lien Law§22 applies to building loan contracts either with orwithout the sale of land.

Contracts Law > Secured Transactions > Perfection &Priority > Priority > Liens > Mechanics' LiensGovernments > Legislation > InterpretationReal Property Law > Financing > Secondary Financing> Lien Priorities[HN3] Applying a liberal construction to N.Y. Lien Law§ 22, the language implies that if a lender fails to complywith the requirements of the Lien Law, its entiremortgage, including that part securing loan proceedsadvanced for the purchase of the property, would becomesubordinate to any subsequently filed mechanic's liens.This interpretation is consistent with the overridingconcern that the lender is the party responsible forcompliance and that the threat of the loss of priority is aneffective deterrent against a lender shirking thisresponsibility.

COUNSEL: Bachner, Tally, Polevoy & Misher, LLP,New York, N.Y. (Richard S. Fries, Todd C. Steckler, andTodd B. Marcus of counsel), for appellant.

Altieri, Kushner, Miuccio & Frind, New York, N.Y.(Albert S. Tablante and Denis B. Frind of counsel), forrespondents.

JUDGES: Copertino, J. P., Joy, Krausman andMcGinity, JJ., concur.

OPINION

[*491] [**607] Ordered that the order is affirmedinsofar as appealed from, with costs.

In this mortgage foreclosure action, the respondents,

inter alia, counterclaimed to foreclose or enforce theirrespective mechanic's liens. The plaintiff moved, interalia, for summary judgment against [***2] them on theground that its recorded mortgage had priority over theirmechanic's liens, at least to the extent of the $ 2,200,000loan given by it to the defendant Forrest House HoldingCompany for land acquisition. The court denied thatbranch of the plaintiff's motion, and the plaintiff appeals.

[HN1] Pursuant to Lien Law § 22, a building loancontract, with or without the sale of land, and anymodification thereto, must be in writing and must be filedwith the County Clerk of the county in which any part ofthe land is situated. "If not so filed the interest of eachparty to such contract in the real property ... is subject tothe lien and claim of a person who shall thereafter file anotice of lien under this chapter" (Lien Law § 22). It isthe plaintiff's contention that so much of its mortgage assecured the loan proceeds apportioned for the purchase ofthe property is outside the scope of Lien Law § 22, andthat it was therefore entitled to summary judgmentagainst the respondents, the holders of various mechanic'sliens. We find that summary judgment was properlydenied.

[**608] [HN2] The subordination provision of LienLaw § 22 applies to building loan contracts "either [***3]with or without the sale of land". [HN3] Applying aliberal construction to this provision (see, [*492] LienLaw § 23), the language implies that if a lender fails tocomply with the requirements of the Lien Law, its entiremortgage, including that part securing loan proceedsadvanced for the purchase of the property, would becomesubordinate to any subsequently filed mechanic's liens.This interpretation is consistent with the overridingconcern that the lender is the party responsible forcompliance and that the threat of the loss of priority is aneffective deterrent against a lender shirking thisresponsibility (see, Nanuet Natl. Bank v EckersonTerrace, 47 NY2d 243, 248). To the extent that thisoutcome may be harsh, "it must be understood that we arehere dealing not with equitable redress, but with astatutorily imposed penalty" ( HNC Realty Co. v GolanHgts. Developers, 79 Misc 2d 696, 703).

Copertino, J. P., Joy, Krausman and McGinity, JJ.,concur.


Exhibit MM: Altshuler Shaham Provident Fund, Ltd v.GML Tower LLC 21 N.Y. 3D 352

1 of 55 DOCUMENTS

Altshuler Shaham Provident Funds, Ltd., Appellant, v GML Tower, LLC, et al.,Defendants, The Pike Company, Inc., et al., Respondents.

No. 115

COURT OF APPEALS OF NEW YORK

21 N.Y.3d 352; 995 N.E.2d 110; 972 N.Y.S.2d 148; 2013 N.Y. LEXIS 1466; 2013 NYSlip Op 4273

May 2, 2013, ArguedJune 11, 2013, Decided

NOTICE:

THE LEXIS PAGINATION OF THIS DOCUMENTIS SUBJECT TO CHANGE PENDING RELEASE OFTHE FINAL PUBLISHED VERSION. THISOPINION IS UNCORRECTED AND SUBJECT TOREVISION BEFORE PUBLICATION IN THEOFFICIAL REPORTS.

SUBSEQUENT HISTORY: Reargument denied by,Motion denied by Altshuler Shaham Provident Funds,Ltd. v. GML Tower, LLC, 21 N.Y.3d 1047, 995 N.E.2d1153, 2013 N.Y. LEXIS 2130, 973 N.Y.S.2d 81 (2013)

PRIOR HISTORY: Altshuler Shaham Provident Funds,Ltd. v. Gml Tower LLC, 83 A.D.3d 1563, 921 N.Y.S.2d601, 2011 N.Y. App. Div. LEXIS 3359 (N.Y. App. Div.4th Dep't, 2011)

DISPOSITION: Judgment appealed from and order ofthe Appellate Division brought up for review modified,without costs, in accordance with the opinion herein and,as so modified, affirmed.

CASE SUMMARY:

PROCEDURAL POSTURE: Respondent mechanic'slienors were granted a summary judgment in a

foreclosure action, which subordinated appellantmortgagee's successor's lien to their mechanic's liens. Theappellate court affirmed. The trial court issued aforeclosure judgment. The successor's appeal wasdismissed by the Supreme Court, Appellate Division,New York. The successor was granted leave to appeal.

OVERVIEW: The state's highest court held that the2007 loan agreement was a building loan contract underLien Law § 2(13). The successor never filed the 2007loan agreement as required by Lien Law § 22, butrecorded the 2007 mortgage made pursuant to it inviolation of § 22. The 2008 amendment to the 2007 loanagreement was also never filed, which also violated § 22.Even if the 2007 loan agreement, as modified by the 2008amendment, was no longer a building loan contract, thesuccessor was not relieved of the obligation to file the2008 amendment. The successor's lien was subordinatedto the mechanic's liens under § 22. The successor wasentitled to priority, however, with respect to the $ 5.5million loan proceeds used to refinance the existingmortgage as that tranche of the loan proceeds closedbefore any monies were advanced for construction, andthe 2007 mortgage in this amount was recorded beforethe contractors began work. The 2008 mortgage, whichthe successor foreclosed, extended the reach of the 2007mortgage. Thus, $ 5.5 million of the loan proceeds,secured by the 2007 and 2008 mortgages, was not subject

Page 1

to the subordination penalty.

OUTCOME: The judgment and the order of theappellate division were modified to provide that thesuccessor had a first priority lien with respect to the loanproceeds used to refinance the existing mortgage. As somodified, the judgment was affirmed.

CORE TERMS: tower, building loan mortgage, lender,mortgage, loan agreement, subordination, modification,acquisition, recorded, mechanic's liens, foreclosure, realproperty, loan proceeds, contractor, recording,mechanic's, building loan, lienor, borrower, hotel,material suppliers, modified, sale of land, county clerk'soffice, expended, trust account, subordinate, unfiled,laborers, loaned


Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'LiensReal Property Law > Priorities & Recording >Recording Acts[HN1] Lien Law § 22 requires that a building loancontract, with or without the sale of land and before orsimultaneously with the recording of a building loanmortgage made pursuant to it, must be filed in the clerk'soffice of the county where land subject to the contract islocated, along with a borrower's affidavit stating theconsideration paid or to be paid for the loan, anyexpenses incurred or to be incurred in connection withthe loan, and the net sum available for the constructionproject. Section 22 also mandates the filing of anysubsequent modifications of a building loan contractwithin 10 days after their execution. Failure to complywith these filing requirements changes the ordinarypriority of liens, with a properly filed mechanic's lientaking priority over the interests of the parties to thecontract. Thus, a construction lender must file thebuilding loan contract in order to achieve lien priority, or,put the opposite way, the statute imposes a so-called"subordination penalty" on a lender who does not do this.The New York legislature has enacted § 22 to permit

contractors on construction projects to learn exactly whatsum the loan in fact made available to the owner of thereal estate for the project. Section 22 subjects a lender'sinterest to the subordination penalty when the lenderknowingly files a materially false borrower's statement.

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'LiensReal Property Law > Priorities & Recording >Recording Acts[HN2] See Lien Law § 22.

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General Overview[HN3] See Lien Law § 2(13).

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General Overview[HN4] A building loan mortgage is a mortgage madepursuant to a building loan contract including anagreement wherein and whereby a building loanmortgage is consolidated with existing mortgages so as toconstitute one lien upon the mortgaged property. LienLaw § 2(14).

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General Overview[HN5] Lien Law § 2(4) defines improvement to includethe demolition, erection, alteration or repair of anystructure upon, connected with, or beneath the surface of,any real property and any work done upon such propertyor materials furnished for its permanent improvement. §2(4).

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPriorities

Page 221 N.Y.3d 352, *; 995 N.E.2d 110, **;

972 N.Y.S.2d 148, ***; 2013 N.Y. LEXIS 1466

Real Property Law > Nonmortgage Liens > Mechanics'LiensReal Property Law > Priorities & Recording >Recording Acts[HN6] Lien Law § 22 does not state that modifications toa building loan contract must be filed only so long as thecontract, as modified, remains a building loan contractwithin the meaning of the Lien Law.

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'LiensReal Property Law > Priorities & Recording >Recording Acts[HN7] Although Lien Law § 22 states that anysubsequent modification to a building loan contract mustbe filed, this language, which also appears in § 22'spredecessor statute, former Mechanics' Lien Law § 21,has always been interpreted to mean any materialsubsequent modification. The New York Supreme Court,Appellate Divisions have set out a test for determiningwhen a modification qualifies as material. A modificationof a building loan contract is material if it: (1) alters therights and liabilities otherwise existing between theparties to the agreement or (2) enlarges, restricts orimpairs the rights of any third-party beneficiary. In theabsence of precedent from the appellate court, the federalcourts have applied the HNC Realty test. An unfiledmodification is material where it restricts of impairs therights of a third-party beneficiary. An unfiledmodification is not a material modification within themeaning of § 22 where the rights of the mechanics'lienors, even if they would be third-party beneficiaries,have not been restricted or impaired and they retain all ofthe rights that exist under the filed building loanagreements.

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General Overview[HN8] By definition, a building loan contract andbuilding loan mortgage only operate with respect tomoney lent for improvements on real property. Therefore,the proceeds from the loan which are lent for thepurchase of the property are not subject to the

subordination penalty of Lien Law § 22.

Real Property Law > Construction Law > ContractsReal Property Law > Financing > Mortgages & OtherSecurity Instruments > General OverviewReal Property Law > Nonmortgage Liens > LienPrioritiesReal Property Law > Nonmortgage Liens > Mechanics'LiensReal Property Law > Priorities & Recording >Recording Acts[HN9] Lien Law § 22 does not state that the entireinterest of each party to an unfiled building loan contractis subject to a later-filed notice of lien, and the appellatecourt does not infer such a limitation from the phraseeither with or without the sale of land. The subordinationpenalty logically applies only to funds loaned to pay forimprovements.

COUNSEL: Bruce H. Lederman, for appellant.

Timothy M. Bittel, for respondent Hayner HoytCorporation.

Thomas P. Givas, for respondent L.A. Painting, Inc.

Jordan R. Pavlus, for respondents TAG MechanicalSystems, Inc. et al.

Submitted by Mark J. Moretti, for respondent PikeCompany.

Submitted by Stewart L. Weisman, for respondentPyramid Roofing & Sheet Metal Co., Inc.

JUDGES: Opinion by Judge Read. Chief Judge Lippmanand Judges Smith, Pigott and Rivera concur. JudgeGraffeo dissents in part in an opinion. JudgeAbdus-Salaam took no part. GRAFFEO, J.: (concurringin part, dissenting in part).

OPINION BY: READ

OPINION

[*357] [***149] [**111] READ, J.:

This mortgage foreclosure action arises from a failedredevelopment of the Hotel Syracuse complex indowntown Syracuse, New York. The complex consists ofseveral properties interconnected by pedestrian bridges:

Page 321 N.Y.3d 352, *; 995 N.E.2d 110, **;

972 N.Y.S.2d 148, ***; 2013 N.Y. LEXIS 1466

the hotel, built in 1924 and closed in 2004, and itsseparate garage (the hotel property); a 15-story towerconstructed in the early 1980's as an addition to the hotel(the tower building); and a building formerly housing amajor department store, vacant since the early 1990's (theAddis building). The lender for the redevelopment andnumerous mechanic's lienors dispute the priority of theirrespective claims to the foreclosure sale proceeds fromthe auction of the tower building, a matter governed byLien Law § 22.

I.

In September 2005, defendant GML Tower LLC(GML Tower) purchased the tower building for $7million, and GML Syracuse LLC (GML Syracuse) andGML Addis LLC (GML Addis) bought the other twoparcels making up the hotel complex for an additional$2.75 million. The predecessor of a now-defunctIllinois-based bank loaned the GML entities $7 millionfor acquisition of these properties, as evidenced by apromissory note and secured by the purchase-moneymortgage in that amount, both dated September 7, 2005.The mortgage, recorded in the Onondaga County Clerk'soffice on September 8, 2005, encumbered all threeparcels.

On March 29, 2007, Perfect Provident Fund Ltd., thepredecessor of plaintiff Altshuler Shaham ProvidentFunds, Ltd. [***150] [**112] (collectively, Altshuler)entered into a "Loan Agreement" (the 2007 loanagreement or the agreement) with GML Tower and itsparent company, Ameris Holdings, Inc. (Ameris),whereby Altshuler agreed to loan them $10 million,bifurcated into tranches of $5.5 and $4.5 million. Theentire principal amount of the loan was due and payable,with accrued interest at 12% per annum, on March 29,2010. To secure payment of the amounts owing toAltshuler under the agreement, GML Tower and Amerisundertook to grant Altshuler a "first ranking senior [l]ien,mortgage, pledge, charge and security interest" (whichthe agreement referred to collectively as the securityinterest) in, among other collateral, the property andimprovements made thereon.

The loan proceeds were to be deposited in a trustaccount as of the date of the agreement's execution anddelivery (i.e., March [*358] 29, 2007), and released bythe trustee on the closing date, April 30, 2007, "forimmediate repayment" to the Illinois-based bank of theoutstanding principal amount of the original $7 million

dollar acquisition financing (the $5.5 million tranche);and for deposit into another dedicated bank account (therestricted account) to be "held . . . and disbursed, usedand applied solely to finance" improvements of the towerbuilding, based upon construction progress as determinedby an inspector appointed by Altshuler (the $4.5 milliontranche). The 2007 loan agreement seems to havecontemplated redevelopment of the tower building intoresidential condominiums and commercial space.1

1 The plans for renovation, improvements andmarketing of the tower building, Exhibit B to theagreement, are not included in the record.

When the transaction did not close on April 30,2007, Altshuler entered into a "Memorandum ofUnderstanding" (the MOU) with GML Tower andAmeris "[i]n connection with" the agreement. The MOU,dated May 1, 2007, set closing dates for the $5.5 millionand $4.5 million tranches of May 1 and May 15, 2007,respectively. The first of the two tranches timely closed,resulting in transfer of $5.5 million from the trust accountto the Illinois-based bank on May 2, 2007. By an"Assignment of Note and Mortgage," executed April 19,2007, the bank assigned the September 7, 2005promissory note and mortgage to Altshuler. Altshulerrecorded this instrument in the Onondaga County Clerk'soffice on May 3, 2007, along with a "Mortgage Extensionand Modification Agreement," dated April 30, 2007,which established $5.5 million as the maximum principalindebtedness secured by the mortgage covering the hotelcomplex (the 2007 mortgage).

The parties failed to close on the $4.5 million tranchein accordance with the MOU. Instead, on six separateoccasions from May 24, 2007 though February 21, 2008,the trustee released monies totaling $2.5 million from thetrust account to GML Tower, pursuant to the parties' jointinstructions and advance letters. These disbursementswere personally guaranteed by Ameris's principal.

Then on March 4, 2008, GML Tower and Amerisentered into "Amendment No. 1" (the 2008 amendmentor the amendment) of the 2007 loan agreement withAltshuler. The 2008 amendment changed theimprovements to be built and the terms and conditions ofthe release to GML Tower and Ameris of the remainingfunds held in the trust account (defined as the [*359]remaining loan proceeds in the principal sum of $2million plus accrued interest and less certain outstandingfees and expenses); [***151] [**113] and provided for

Page 421 N.Y.3d 352, *357; 995 N.E.2d 110, **111;

972 N.Y.S.2d 148, ***149; 2013 N.Y. LEXIS 1466

the delivery of additional collateral to Altshuler assecurity for the $10 million loan2. To these ends, the2008 amendment called for construction of residentialand commercial rental units in the tower building ratherthan condominiums; added the Addis building ascollateral; and eliminated the restricted account,providing instead for the trustee to release the remainingfunds to GML Tower on March 6, 2008, the new closingdate, as an unrestricted lump sum. With the disbursementof these funds, the existing promissory note was canceledand replaced and restated by a replacement note (the2008 note), the guaranties covering the $2.5 million wererescinded, and Ameris's principal gave a new personalguaranty in the principal sum of $250,000. Additionally,the lien of the mortgage was apparently released withrespect to the hotel property owned by GML Syracuse.

2 The 2008 amendment, a 41-page documentplus annexes and exhibits, refers to the 2007 loanagreement as the "Original Loan Agreement," as"supplemented and modified" by the MOU.

Concomitantly, GML Tower and GML Addisentered into a "Mortgage Increase, Modification, andSpreader Agreement" (the 2008 mortgage) with Altshuleron March 4, 2008. The 2008 mortgage extended the reachof the 2007 mortgage to cover the Addis building inaddition to the tower building, and increased the principalamount secured from $5.5 to $10 million. The 2008mortgage was recorded in the Onondaga County Clerk'soffice on March 7, 2008. To provide Altshuler withadditional collateral, GML Tower and GML Addis alsoexecuted an "Assignment of Leases and Rents" withrespect to the tower and Addis buildings, dated March 4,2008 and recorded in the Onondaga County Clerk's officeon March 7, 2008 (the 2008 assignment).

On December 4, 2008, Altshuler commenced thisforeclosure action against Ameris, GML Tower and GMLAddis,3 and other defendants, including The Hayner HoytCorporation (Hayner), Syracuse Merit Electric (Merit)and the Pike Company, Inc. (Pike) (collectively, themechanic's lienors). Hayner, Merit and [*360] Pikebegan work on the tower building on July 16, 2007,January 20, 2008 and September 4, 2007, respectively;and filed notices of mechanic's liens on October 31, 2008,December 3, 2008, and September 18, 2009, respectively.Altshuler alleged that GML Tower and Ameris were indefault under the terms of the 2007 loan agreement, asmodified by the 2008 amendment, and the 2008 note, and

that GML Tower and GML Addis were in default underthe terms of the 2008 mortgage and the 2008 assignmentbecause mechanic's liens totaling more than $3.755million had been filed against the tower building, andbecause they failed to pay real property taxes on thetower and Addis buildings.

3 These GML entities and Ameris eventuallydefaulted in this litigation, as did anotherdefendant, Ameris's principal, who had given hispersonal guaranty for $250,000 when Altshulertransferred the loan proceeds remaining in thetrust account (roughly $2 million) to GML Towerand Ameris on March 6, 2008 pursuant to the2008 amendment.

Altshuler sought foreclosure of both buildings andrecoupment of the full amount of its $10 million loan,together with interest and late charges, and first priorityto the proceeds of the foreclosure sales of the twoproperties. The mechanic's lienors, for their part, movedor cross-moved for summary judgment, seeking an orderthat their liens were superior to the 2008 mortgage thatAltshuler sought to foreclose. The mechanic's lienors also[***152] [**114] contested the priority of liens asamongst themselves.

In a decision dated May 17, 2010, Supreme Courtobserved that the parties acknowledged that Lien Law §22 subordinates a building loan mortgage made pursuantto an unfiled building loan contract to subsequently filedmechanic's liens, but disputed whether the 2007 loanagreement was a building loan contract (see 28 Misc 3d475, 478, 900 N.Y.S.2d 846 [Sup Ct Onondaga County2010]). The judge ultimately concluded that it was: theloan agreement was made between a lender and an ownerof real property; GML Tower and Ameris made anexpress promise to construct improvements to theproperty; Altshuler agreed to make periodic advances of$4.5 million to fund these improvements; Altshuler wasto be informed of construction progress; and the $10million loan was to be secured by a mortgage on realproperty, and "even label[ed] itself a 'construction loantransaction[]'" (id. at 479-480).

The judge additionally rejected Altshuler'salternative argument that it was at least entitled topriority with respect to the $5.5 million used to refinancethe tower building's acquisition. She concluded that theentire $10 million mortgage was subordinate to thesubsequently filed mechanic's liens, relying on Atlantic

Page 521 N.Y.3d 352, *359; 995 N.E.2d 110, **113;

972 N.Y.S.2d 148, ***151; 2013 N.Y. LEXIS 1466

Bank of New York v Forrest House Holding Co. (234AD2d 491, 492, 651 N.Y.S.2d 607 [2d Dept 1996]), anddeclining to follow Yankee Bank [*361] for Finance &Savings, FSB v Task Associates, Inc. (731 F Supp 64, 71n 2 [ND NY 1990]).

Accordingly, Supreme Court granted Hayner'smotion and Merit's and Pike's cross motions to the extentthey argued their mechanic's liens were superior toAltshuler's mortgage. The judge further agreed withMerit that its lien was superior to Hayner's under LienLaw § 56 "because it was a subcontractor to [Hayner] asgeneral contractor" (id. at 482); and turned down Pike'sargument that "its lien [was] superior to all otherspursuant to section 13 [of the Lien Law] because itperformed labor" (id.). Altshuler appealed SupremeCourt's ensuing order, entered May 20, 2010.

On April 29, 2011, the Appellate Division affirmed"for reasons stated in the decision at Supreme Court" (83AD3d 1563, 1563, 921 N.Y.S.2d 601 [4th Dept 2011]).The Court did not address Altshuler's argument that the2007 loan agreement was merely "a preliminaryagreement that expired before the mortgage at issue wasfiled" because this contention was "raised for the firsttime on appeal and could have been obviated or cured byfactual showings or legal countersteps in Supreme Court"(id. [internal quotation marks omitted])4. On July 1,2011, the same panel denied Altshuler's motion for leaveto appeal to us (86 AD3d 934, 926 N.Y.S.2d 838 [4thDept 2011]).

4 Although not pursuing the option in this case,the Appellate Division may, in the exercise of its"interests of justice" jurisdiction, always reach anissue not preserved at Supreme Court (see Martinv City of Cohoes, 37 NY2d 162, 165, 332 N.E.2d867, 371 N.Y.S.2d 687 [1975]). The Court ofAppeals, by contrast, generally lacks power toreview unpreserved issues even where theAppellate Division has chosen to do so (seeBrown v City of New York, 60 NY2d 893, 894,458 N.E.2d 1248, 470 N.Y.S.2d 571 [1983]; seealso Hecker v State, 20 NY3d 1087, 1087, 987N.E.2d 636, 965 N.Y.S.2d 75 [2013]).

On October 26, 2011, Supreme Court issued anagreed-upon "Final Order for Judgment of Foreclosureand Sale," which awarded Altshuler a judgment of $10million; dismissed Altshuler's causes of action seeking adeclaration that its mortgage enjoyed first priority; set out

the priority [***153] [**115] and amounts of themechanic's liens; ordered sale of the tower and Addisbuildings;5 and directed the referee to file his reportafterwards. The order also stayed the foreclosure sale ofthe tower building pending disposition of Altshuler'sappeal. Since Altshuler contested only the priority ofrights to the proceeds from the sale, however, we [*362]declined to apply the exception to the finality rule forirreparable injury, and dismissed Altshuler's appeal onFebruary 9, 2012 (18 NY3d 892, 963 N.E.2d 778, 940N.Y.S.2d 202 [2012]); on May 3, 2012, we deniedreargument (19 NY3d 837, 969 N.E.2d 209, 946N.Y.S.2d 93 [2012]). In the meantime, Supreme Court,by order signed March 29, 2012, vacated the stay ofenforcement.

5 There were no mechanic's liens filed againstthe Addis building, which sold at public auctionon August 7, 2012 for $200,000. Altshuler waspaid $198,750, the sale proceeds less the referee'sfee.

The tower building was sold at public auction onJune 6, 2012 for $1,396,633.82, and Supreme Courtconfirmed the referee's report on July 12, 2012. Haynerwas the purchaser6. Altshuler then again sought leave toappeal, which we granted on October 23, 2012 (19 NY3d814, 979 N.E.2d 813, 955 N.Y.S.2d 552 [2012]).

6 The tower building's sale price was justsufficient to pay Pike, to pay Hayner'ssubcontractors, to reimburse Altshuler forexpenses incurred during the pendency of theforeclosure, and to pay the referee's expenses,with $1,711.89 left over to refund to Haynor.

II.

[HN1] Section 22 of the Lien Law requires that abuilding loan contract, with or without the sale of landand before or simultaneously with the recording of abuilding loan mortgage made pursuant to it, must be filedin the clerk's office of the county where land subject tothe contract is located, along with a borrower's affidavitstating the consideration paid or to be paid for the loan,any expenses incurred or to be incurred in connectionwith the loan, and the net sum available for theconstruction project. Section 22 also mandates the filingof any subsequent modifications of a building loancontract within 10 days after their execution. Failure tocomply with these filing requirements changes the

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ordinary priority of liens, with a properly filed mechanic'slien taking priority over the interests of the parties to thecontract7. Thus, a construction lender must [*363] filethe building loan contract in order to achieve lien priority,or, put the opposite way, the statute imposes a so-called"subordination penalty" on a lender who does not do this.We have said that the Legislature enacted section 22 topermit contractors on construction projects "to learnexactly what sum the loan in fact made available to theowner of the real estate for the project" (Nanuet Natl.[***154] [**116] Bank v Eckerson Terrace, 47 NY2d243, 247, 391 N.E.2d 983, 417 N.Y.S.2d 901 [1979][holding that section 22 subjects a lender's interest to thesubordination penalty when the lender knowingly files amaterially false borrower's statement]).

7 Section 22, in relevant part, states as follows:[HN2] "A building loan contract either with orwithout the sale of land, and any modificationthereof, must be in writing and dulyacknowledged, and must contain a true statementunder oath, verified by the borrower, showing theconsideration paid, or to be paid, for the loandescribed therein, and showing all other expenses,if any, incurred, or to be incurred in connectiontherewith, and the net sum available to theborrower for the improvement, and, on or beforethe date of recording the building loan mortgagemade pursuant thereto, to be filed in the office ofthe clerk of the county in which any part of theland is situated, except that any subsequentmodification of any such building loan contract sofiled must be filed within ten days after theexecution of any such modification. . . . If not sofiled the interest of each party to such contract inthe real property affected thereby, is subject to thelien and claim of a person who shall thereafterfile a notice of lien under [the Lien Law]" (LienLaw § 22 [emphasis added]).

Section 2 (13) of the Lien Law, defines a [HN3]"building loan contract" as

"a contract whereby a . . . 'lender,' inconsideration of the express promise of anowner to make an improvement8 upon realproperty, agrees to make advances to orfor the account of such owner to besecured by a mortgage on such realproperty, whether such advances represent

moneys to be loaned or represent moneysto be paid" (Lien Law § 2 [13]).

And [HN4] a "building loan mortgage" is "a mortgagemade pursuant to a building loan contract . . . ,includ[ing] an agreement wherein and whereby a buildingloan mortgage is consolidated with existing mortgages soas to constitute one lien upon the mortgaged property"(Lien Law § 2 [14]).

8 [HN5] Section 2 (4) of the Lien Law defines"improvement" to include, among other things,"the demolition, erection, alteration or repair ofany structure upon, connected with, or beneath thesurface of, any real property and any work doneupon such property or materials furnished for itspermanent improvement" (Lien Law § 2 [4]).

The 2007 loan agreement is a building loan contractas defined under section 2 (3) of the Lien Law: theagreement called for transfer of $4.5 of the $10 milliondeposited by Altshuler into the trust account to adedicated bank account of GML Tower/Ameris (therestricted account), to be "released if, when and asrequired to finance and pay [for] the construction of" theimprovements to the tower building, "subject to the termsand conditions of" the construction plans, and these loanproceeds were to be secured by a mortgage. Because the2007 loan agreement was a building loan contract, LienLaw § 22 obligated Altshuler to file the agreement in theOnondaga County [*364] Clerk's office prior to therecording of any mortgage made pursuant thereto, orsuffer loss of lien priority. Altshuler never filed the 2007loan agreement; it recorded the 2007 mortgage on May 3,2007.

Altshuler counters that the 2007 mortgage was notrecorded "pursuant []to" the 2007 loan agreement asrequired by Lien Law § 22; however, the recordedmortgage states that it is "to secure . . . payment and/orperformance of all indebtedness and obligations of [GMLTower] and/or Ameris described in the [2007 loanagreement]." Additionally, the 2007 loan agreementdirected that Altshuler's security interest in the propertybe "perfected and duly recorded" in Onondaga County,and the agreement defined a security interest to include amortgage. In short, the 2007 mortgage was madepursuant to the unfiled agreement.

Next, the 2008 amendment is explicitly labeled an"amendment" to the 2007 loan agreement, designed to

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"amend the terms and conditions for release of the[r]emaining [f]unds" to GML Tower and Ameris, and to"revise" the improvement plans in the agreement to fit thenew plan to construct rental apartments rather thancondominiums. In fact, the 2008 amendment is not astand-alone document; it is essentially a compilation ofedits of various provisions in the 2007 loan agreement,and must be read together with that earlier document inorder to be intelligible. Altshuler never filed the 2008amendment. This was another violation of section 22,which specifies that modifications of building loancontracts must be filed.

Altshuler contends, though, that assuming the 2007loan agreement is a building loan contract (and we havenow held [***155] [**117] that it is), the 2008amendment converted the agreement into a standard loancontract, and the 2008 mortgage was recorded pursuant tothe amendment, not the agreement. But even if Altshuleris correct that the 2007 loan agreement, as modified bythe 2008 amendment, was no longer a building loancontract as defined by Lien Law § 2 (13) -- a question weneed not and do not decide -- it does not follow thatAltshuler was relieved of the obligation to file theamendment. [HN6] Lien Law § 22 does not state thatmodifications to a building loan contract must be filedonly so long as the contract, as modified, remains abuilding loan contract within the meaning of the LienLaw. This makes sense, given that the reason for publicfiling is to allow any interested contractors,subcontractors and material suppliers to discover thelevel of financing available for construction so that they[*365] might guide their actions accordingly (seeNanuet, 47 NY2d at 247). Further, if the 2007 loanagreement had been filed, as it should have been,Altshuler's failure to file the 2008 amendment clearlywould have violated the statute9. Altshuler should notbenefit from an earlier violation of the law.

9 [HN7] Although section 22 states that "anysubsequent modification" (emphasis added) to abuilding loan contract must be filed, thislanguage, which also appeared in section 22'spredecessor statute, former Mechanics' Lien Law§ 21, has always been interpreted to mean any"material" subsequent modification (seePennsylvania Steel Co. v Title Guar. & Trust Co.,193 NY 37, 42, 85 N.E. 820 [1908], rearg denied193 NY 682, 87 N.E. 1124 [1908]). The AppellateDivisions have set out a test for determining when

a modification qualifies as material (see HNCRealty Co. v Bay View Towers Apts., 64 AD2d417, 426, 409 N.Y.S.2d 774 [2d Dept 1978] ["amodification of a building loan contract is'material' if it (1) alters the rights and liabilitiesotherwise existing between the parties to theagreement or (2) enlarges, restricts or impairs therights of any third-party beneficiary"]; HowardSav. Bank v. Lefcon Partnership, 209 AD2d 473,475, 618 N.Y.S.2d 910 [2d Dept 1994] [same]).In the absence of precedent from our court, thefederal courts have applied the HNC Realty test(see Yankee Bank, 731 F Supp at 70 [holding thatunfiled modification was material because itrestricted or impaired the rights of a third-partybeneficiary]; In re Lynch III Props. Corp., 125BR 857, 861 [Bankr ED NY 1991] [holding thatthe unfiled modification was "not a materialmodification . . . within the meaning of section 22of the New York Lien Law" because "[t]he rightsof the mechanics' lienors, even if they would bethird-party beneficiaries, have not been restrictedor impaired and they retain all of the rights thatexist under the filed Building Loan Agreements"];but see In re Admiral's Walk, Inc., 134 BR 105,121 [Bankr WD NY 1991] [criticizing HNCRealty, and suggesting that the underlying facts incases considering the materiality of a modificationhave never shown that "alteration of rights asbetween the lender and borrower is . . . alonesufficient to warrant subordination -- there mustalso be some element of impairment of rights ofsection 22 beneficiaries in order that amodification be so 'material' or 'essential' as towarrant its filing, on penalty of subordination"]).We do not need to address the proper test formateriality on this appeal. By arguing that the2008 amendment transformed the fundamentalcharacter of the 2007 loan agreement, Altshulereffectively concedes that the amendment workeda material modification under any conceivabletest.

III.

Finally, we consider whether Altshuler is entitled topriority with respect to the $5.5 million of the loanproceeds used to refinance the existing mortgage, whichcovered the tower building, the Addis building, and thehotel property. Before this litigation, the Atlantic Bank

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and Yankee Bank courts considered whether asubordination penalty applies to funds loaned in abuilding loan contract for financing the purchase of theproperty on which the improvements are to be made.They reached opposite conclusions.

[*366] [***156] [**118] In Atlantic Bank, aforeclosure action, the plaintiff bank sought summaryjudgment against the mechanic's lienor defendants on theground that its recorded mortgage had priority, at least tothe extent of the $2.2 million loan given by it to theborrower for land acquisition. Applying a liberalinterpretation, the Appellate Division took inclusion ofthe phrase "either with or without the sale of land" insection 22 to "impl[y] that if a lender fails to comply withthe requirements of the Lien Law, its entire mortgage,including that part securing loan proceeds advanced forthe purchase of the property, would become subordinateto any subsequently filed mechanic's liens" (234 AD2d at492 [emphasis added]).

Yankee Bank was a foreclosure action that wasremoved to federal court when the Federal Home LoanBank Board found the plaintiff bank to be insolvent andappointed the Federal Deposit Insurance Corporation(FDIC) as receiver. The FDIC was consequentlyeffectively substituted for the bank as plaintiff. Thesubject of the litigation was another building in Syracuse,New York, and the issue before the District Court Judgewas the priority of rights to the foreclosure sale proceedsas between the FDIC and the mechanic's lienordefendants.

The Judge first decided that New York law suppliedthe rule of decision. In this particular case, the buildingloan contract between the bank and the developersallowed the bank to advance up to $610,000 for theacquisition of the building, and provided that noadditional funds would be released until the developersobtained a surety payment bond. The bank, however,advanced funds beyond $610,000 without the requiredbond being in place. The mechanic's lienor defendantsargued that this was an unfiled modification of thecontract in violation of Lien Law § 22. The Judge agreed,and so held that the bank's mortgage would besubordinated to the defendants' interests. He then turnedhis attention to the question of the degree ofsubordination.

The building loan contract apparently earmarked thisfirst advance of $610,000 for acquisition of the building,

and the parties do not seem to have disputed that moneyloaned for this purpose was not subject to thesubordination penalty. In this regard, the Judge observedthat

[HN8] "[b]y definition a 'building loancontract' and 'building loan mortgage' onlyoperate with respect to money lent forimprovements on real property. [*367]Therefore, the proceeds from the loanwhich were lent for the purchase of theproperty are not subject to thesubordination penalty of Lien Law § 22"(731 F Supp at 71, n 2] [internal citationomitted]).

In fact, though, the amount of the loan proceedsexpended to buy the building was only approximately$250,000. As a result, the dispute between the FDIC andthe mechanic's lienor defendants centered on whether theFDIC had a first priority lien in the foreclosure saleproceeds for $610,000, or the lesser amount actuallyexpended toward purchase of the building. The Judgeruled that the FDIC would enjoy first priority in anamount equivalent to what was actually spent (to bedetermined by the magistrate)10 rather than [***157][**119] the full $610,000 in the first advance, and themechanic's lienor defendants would be paid anyforeclosure sale proceeds beyond this amount.

10 The dissent opines that the subordinationpenalty will "likely . . . prove difficult to enforce"if loan proceeds for property acquisition areexcluded from its scope, commenting that "it maybe difficult to discern precisely what proportion ofa loan was earmarked for acquisition expensesand what portion was actually expended for thatpurpose," pointing to the referral to the magistratein Yankee Bank as an example (dissenting op at7-8). First, there does not seem to have been muchdispute in Yankee Bank over how much of theloan was actually applied to the building'spurchase price (there was a deed filed in thecounty clerk's office, after all). Rather, the recordwas apparently incomplete on this score becausethe magistrate had concluded that the rights of themechanic's lienor defendants were to bedetermined with reference to the amountcommitted by the loan agreement towardacquisition rather than the amount actually spent

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for that purpose. In this case there is no differencebetween the amount of the loan "earmarked" and"actually expended" to refinance the loan made toacquire the three properties making up the hotelcomplex -- i.e., $5.5 million. This is probably byfar the more common situation. In any event,given that the amount "earmarked" and theamount "actually expended" are identical in thiscase, we need not resolve and express no opinionas to which would be properly excluded from thescope of the subordination penalty in a case, likeYankee Bank, where there is a difference.

This result is consistent with the language of LienLaw §§ 22 and 2 (3), (13) and (14), and does notcontravene the statute's purpose, to give contractors andmaterial suppliers notice of how much money a buildingloan makes available for construction. [HN9] Section 22does not state that the entire interest of each party to anunfiled building loan contract is subject to a later-filednotice of lien, and we do not infer such a limitation fromthe phrase "either with or without the sale of land," as didthe Atlantic Bank court. As the Yankee Bank courtpointed out, the subordination penalty logically appliesonly to funds loaned to pay for improvements. Here, the2007 loan agreement [*368] allocated $5.5 million ofthe loan proceeds to pay off the existing purchase- moneymortgage. This tranche closed before any monies wereadvanced for construction, and the 2007 mortgage in thisamount was recorded before any contractor began workon the project. The 2008 mortgage, which Altshulerforeclosed in this litigation, simply extended the reach ofand increased the principal amount secured by the 2007mortgage. We therefore conclude that $5.5 million of theloan proceeds, secured by the 2007 and 2008 mortgages,was not subject to the subordination penalty.

Accordingly, the judgment appealed from and theorder of the Appellate Division brought up for reviewshould be modified, without costs, in accordance withthis opinion and, as so modified, affirmed.

CONCUR BY: GRAFFEO (In Part)

DISSENT BY: GRAFFEO (In Part)

DISSENT

GRAFFEO, J.: (concurring in part, dissenting inpart)

I join that part of the majority opinion determiningthat the 2007 Loan Agreement was a building loancontract within the meaning of Lien Law § 22. However,because I read the plain language of the subordinationpenalty in this statute to apply to the lender's "interest . . .in the real property" -- the total mortgage and not just theportion attributable to construction funds -- I respectfullydissent from the majority's conclusion that $5.5 Millionof the loan proceeds were not subject to the subordinationpenalty.

As the majority explains, Lien Law § 22 establishesa recording requirement relating to a "building loancontract" as follows:

"A building loan contract either with orwithout the sale of land, and anymodification thereof, must be in writingand duly acknowledged, and must containa true statement under oath, verified by theborrower, showing the consideration paid,or to be paid, for the loan describedtherein, and showing all other expenses, ifany incurred, or to be incurred inconnection therewith, and the net sumavailable to the borrower for theimprovement, and, on or before the[***158] [**120] date of recording thebuilding loan mortgage made pursuantthereto, to be filed in the office of the clerkof the county in which any part of the landis situated, except that any subsequentmodification of any such building loancontract so filed must be filed within tendays after the execution of any suchmodification" (emphasis added).

[*369] As a consequence of the failure to comply withthe recording requirement, Lien Law § 22 imposes whathas come to be known as the subordination penalty,providing that if the building loan contract is "not so filedthe interest of each party to such contract in the realproperty affected thereby is subject to the lien and claimof a person who shall thereafter file a notice of lien underthis chapter." In other words, even though a lender'smortgage might have been recorded first, if it was issuedpursuant to a building loan contract that was not properlyrecorded, the lender's mortgage loses its first-in-timepriority and becomes subordinate tosubsequently-recorded mechanics' liens.

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The recording requirement is intended to benefitcontractors, laborers and material suppliers who work onconstruction projects. Its purpose is "to readily enable acontractor to learn exactly what sum the loan in fact madeavailable to the owner of the real estate for the project"(Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243,247, 391 N.E.2d 983, 417 N.Y.S.2d 901 [1979][inclusion of false information in building loan contractthat was recorded triggered subordination penalty]; seealso Howard Sav. Bank v Lefcon Partnership, 209 AD2d473, 476, 618 N.Y.S.2d 910 [2d Dept 1994], lv dismissed86 NY2d 837, 658 N.E.2d 223, 634 N.Y.S.2d 445[1995]), and to preclude lenders and owners fromentering into "secret agreements" in that regard.

Plaintiff lender argues -- and the majority accepts --that Lien Law § 22 does not require that thesubordination penalty apply to the entire mortgage butcovers only the portion relating to the advancement ofconstruction funds. It further asserts that, since thepurpose of the statute is to protect contractors, laborersand material suppliers, it makes no sense to preclude alender from claiming priority with respect to the portionof the loan that had nothing to do with construction butrelated to the initial acquisition of the property. In myview, this argument should be rejected because the plainlanguage of the statute directs that the full mortgageinterest -- not just the part securing the funds used forconstruction purposes -- is subject to the subordinationpenalty, as two New York courts had held before theAppellate Division reached the same conclusion in thiscase (see Atlantic Bank of N.Y. v Forrest House HoldingCo., 234 AD2d 491, 651 N.Y.S.2d 607 [2d Dept 1996];HNC Realty Co. v Golan Hgts. Dev., 79 Misc 2d 696,360 N.Y.S.2d 954 [Sup Ct 1974]).

Critically, Lien Law § 22 begins by indicating thatthe statute applies to "[a] building loan contract eitherwith or without the sale of land," thereby contemplatingbuilding loan agreements in which money is loaned bothto purchase the property and [*370] constructimprovements. Thus, just because some of the fundsdisbursed relate to the acquisition of the real property tobe improved (or, in this case, the refinance of a mortgagepreviously used to acquire the real property to beimproved), this does not prevent a loan agreement thatotherwise meets the building loan contract criteria frombeing subject to the recording rule (as the majority alsoconcludes). It is therefore clear that the Legislatureunderstood that there would be contracts like the one here

where acquisition funds and construction monies wouldbe addressed in [***159] [**121] a single loan securedby a mortgage. Nonetheless the subordination penaltythat appears later in the statute does not include anylanguage indicating an intent to exclude that portion of amortgage securing acquisition funds from its scope.Rather, it provides, in broad terms, that "the interest ofeach party to such contract in the real property affectedthereby is subject to the lien and claim of a person" wholater files a mechanic's lien (Lien Law § 22 [emphasisadded]). It is the "interest" of the lender "in the realproperty" that is subordinated to later-filed mechanics'liens -- and the lender's interest in the real property isreflected in the entire mortgage, not merely a portion ofit. As the Appellate Division explained in Atlantic Bank,

"if a lender fails to comply with therequirements of the Lien Law, its entiremortgage, including the part securing loanproceeds advanced for the purchase of theproperty, would become subordinate toany subsequently filed mechanic's liens.This interpretation is consistent with theoverriding concern that the lender is theparty responsible for compliance and thatthe threat of the loss of priority is aneffective deterrent against a lendershirking this responsibility . . . To theextent that this outcome may be harsh, itmust be understood that we are heredealing not with equitable redress, butwith a statutorily imposed penalty"(Atlantic Bank, 234 AD2d at 492 [internalquotation marks and citation omitted]).

In arguing to the contrary, the lender relies onYankee Bank for Fin. & Sav. FSB v Task Assoc., Inc. (731F Supp 64 [ND NY 1990]), a Federal District Courtdecision that was issued before the Appellate Divisiondecided Atlantic Bank. Although the majority finds thiscase to be persuasive, I believe that reliance is misplaced.First, as the majority acknowledges, in Yankee [*371]Bank neither party asserted that funds used for acquisitionof the building were subject to the subordination penaltyso the court was not confronted with the precise issuepresented here. Second, without addressing the plainlanguage in the subordination penalty, the District Courtheld in summary fashion that the lender retained its firstpriority interest in the foreclosure sale proceeds "only up

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to that amount actually expended toward the purchase ofthe . . . building," with the remainder of its interestsubordinated to the mechanic's lienors. It is evident froma footnote that, rather than interpreting the subordinationpenalty itself, the court considered only the definitions of"building loan contract" and "building loan mortgage."Noting (erroneously, in my view) that these definitionsrelate only to monies advanced for improvements onproperty, the court reasoned that "the proceeds from theloan which were lent for the purchase of the propertywere not subject to the subordination penalty" (731 FSupp 64 at n 2). But I believe that the Lien Law takes amore encompassing view. Section 22 makes clear that thesubordination penalty applies to a building loan contract,regardless of whether it involves the sale of land, andthen indicates it is the lender's interest in the realproperty that is subordinated. The lender's interest in theproperty is the total mortgage, not just the portion thatcorrelates to the loan of construction funds. I thereforeprefer the better-reasoned New York precedent.

Since the statutory language warrants a finding thatthe entire mortgage is subordinated when a building loancontract is not recorded, both Supreme Court and theAppellate Division properly concluded in this case thatthe lender's $10 Million mortgage was subordinate to themechanics' liens. Although this appears to wipe [***160][**122] out any recovery for the lender, the Legislatureadopted this statutory penalty to dissuade lenders fromengaging in the very conduct that occurred here: failingto comply with the building loan contract recordingrequirement. Here, none of the agreements relating to thisloan were recorded: not the Loan Agreement, theMemorandum of Understanding nor Amendment No. 1,which was executed contemporaneously with the 2008mortgage. And timely filing of documents andamendments is particularly necessary in cases such as thiswhere aspects of the loan fail to close on time andmaterial terms are amended while the project is ongoing-- facts that can raise red flags to interested contractors,laborers and material suppliers if revealed.

[*372] I believe that the rule the majority hasfashioned is antithetical to the purpose of the penalty andis likely to prove difficult to enforce. The subordinationpenalty is triggered when a lender fails to record abuilding loan contract or amendments thereto, or wheninformation in filed agreements proves to be false. Theburden it imposes on lenders is minimal -- the statutoryrequirement is met merely by filing the pertinent

documents in the County Clerk's Office. One of thepurposes behind the recording requirement is to makefuture contractors, laborers and material suppliers awareof the funds available for construction so that, prior toworking on a project, they can make knowledgeabledecisions concerning the amount of labor or materials toexpend and the type of payment and security terms todemand. When acquisition funds are part of the loan, thisnecessarily diminishes the amount available to fundimprovements on the real property. But if contractors areunaware of the extent to which the loan coversacquisition costs due to the failure to file a building loancontract, they may expend more labor and materials, andon different terms, than would have been the case hadthey been provided with the accurate information that thestatute requires.

Moreover, if documents are not timely filed prior tothe recording of the mortgage, resulting in the terms ofthe loan not being reflected in the public record, courtswill be left to reconstruct the loan agreement between thelender and the building owner after the fact during aforeclosure action or other litigation when there may bedisputes concerning the scope of the contract and theintent and effect of various written and oralmodifications. This problem is apparent here where thelender's view concerning the terms of the arrangement --whether certain documents were superceded or remainedin effect -- has evolved over the course of litigation andwhere the defaulting borrower did not participate andclarify the record. The bottom line is that, after a deal hasgone south, it may be difficult to discern precisely whatproportion of a loan was earmarked for acquisitionexpenses and what portion was actually expended for thatpurpose (a dispute of that kind apparently arose in YankeeBank) -- and the courts, as well as the contractors,laborers and material suppliers will be at the mercy of theparties to the loan to resolve the controversy. Timelyrecording of the proper documents when the loan occursand prior to the filing of the mortgage obviates thisproblem. Of course, the subordination penalty will onlycome into play when that [*373] has not happened and Ifear that the rule the majority adopts today will add to theconfusion.

For all of these reasons, I conclude that the majority'sbifurcation rule unnecessarily complicates the applicationof the subordination penalty which, as constructed by theLegislature, should be straightforward and requirenothing more than giving the lender's mortgage the

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priority it would [***161] [**123] have had if it hadbeen recorded after the mechanics' liens. The Legislatureappears to have made a considered decision that asbetween the lender, who could have protected itsinvestment in full merely by timely recording itsdocuments, and the contractors, laborers and materialsuppliers, who were inappropriately kept in the dark, it isthe lender who should bear the loss. It is not for thecourts to disturb that decision by creating a limitation onthe subordination penalty that does not appear anywherein the statute. Because the majority does so, I respectfullydissent from the majority's opinion to the extent that itholds that $5.5 Million of the loan proceeds were not

subject to the subordination penalty.

* * * *

Judgment appealed from and order of the AppellateDivision brought up for review modified, without costs,in accordance with the opinion herein and, as somodified, affirmed. Opinion by Judge Read. Chief JudgeLippman and Judges Smith, Pigott and Rivera concur.Judge Graffeo dissents in part in an opinion.

Judge Abdus-Salaam took no part.Decided June 11, 2013

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Exhibit NN: Lehman Brothers Holdings Inc v. GenwoodStrathaller LLC 2011 NY Misc. Lexis 6154

1 of 52 DOCUMENTS

LEHMAN BROTHERS HOLDINGS INC., and SASCO 2008-C2, LLC, Plaintiff v.GENWOOD STRATHALLAN LLC; NEW YORK STATE DEPARTMENT OF

TAXATION AND FINANCE; ATLANTIC GRANITE & MARBLE, INC.,; STICKSAND STONES, INC.; M&T REMODELING SERVICES, INC.; ANDREW J.

PRINCIPE d/b/a PRINCIPE AIR COMPONENTS; JOHN DOE AND MARY DOESuch Names Being Fictitious, it Being the Intention of the Plaintiff to Designate Any

Occupants of the Mortgaged Premises Who May Have Any Interest in the Same,Defendants.

Index No. 2010/10157

SUPREME COURT OF NEW YORK, MONROE COUNTY

2011 N.Y. Misc. LEXIS 6154

October 11, 2011, DecidedOctober 29, 2011, Filed

NOTICE: NOT APPROVED BY REPORTER OFDECISIONS FOR REPORTING IN STATE REPORTS.

CORE TERMS: repair, mortgage, escrow, borrower's,loan agreement, consolidated, lender, disbursed, deposits,escrow accounts, building loan, summary judgment,security agreement, mechanics lien, Lien Law, buildingloan, real property, citations omitted, counterclaim,foreclosure, prima facie, issues of fact, express promise,cross-claim, entitlement, collateral, deposited, subpoena,security interest, hotel

JUDGES: [*1] KENNETH R. FISHER, JUSTICESUPREME COURT.

OPINION BY: KENNETH R. FISHER

OPINION

DECISION AND ORDER

Plaintiffs, Lehman Brothers Holdings Inc. ("LBH or

Lender") and SASCO 2008-C2, LLC ("Sasco") movepursuant to CPLR 3212 for an order granting summaryjudgment as follows: an order (1) dismissing thecounterclaim of Defendant M&T Remodeling Services,Inc. ("M&T"), (2) severing the cross-claim of M&T; (3)directing the entry of judgment in plaintiffs' favor againstdefendants for the relief demanded in the verifiedcomplaint, including foreclosure of the mortgages anddisposition of the collateral that is the subject of thesecurity agreement; (4) severing and striking the action asto John Doe and Mary; and (5) referring this matter to aduly appointed referee.

In a separate motion, defendant Genwood StrathallenLLC's ("Genwood" or "Borrower") moves for an orderpursuant to CPLR 2304 quashing or modifying asubpoena served on it by co-defendant M&T RemodelingServices, Inc. ("M&T").

The subpoena seeks a deposition and production ofdocuments in this action generally centered around theloans and mortgages that are the subject of this action andcommunications between Genwood and plaintiff.

Page 1

Genwood argues that [*2] it has not appeared oranswered the present action and there are no claims orcrossclaims between M&T Remodeling and it and M&Tcould not possibly need this information to defend attrial. Genwood argues that M&T is using this action toaid in its Florida action against Genwood seeking tocollect on monies owed for services that are the subject ofthe lien which M&T asserts in this action. M&T'smaintains that the documents and testimony it seeks arenecessary to establish M&T's defense to the foreclosureaction that its lien has priority over plaintiffs'.

This is an action to foreclose on certain consolidatedmortgages and security agreements. On January 23, 2007,LaSalle Bank assigned various mortgages, previouslyspread and consolidated, to LBH. On January 30, 2007,defendant Genwood Strathallen LLC ("Genwood" or"Borrower") executed a Consolidated, Amended andRestated Mortgage Note ("Consolidated Note") in favorof LBH for $14,600,000. Also on January 30, 2007,Genwood executed a Consolidated, Amended andRestated Mortgage, Assignment of Leases and Rents andSecurity Agreement ("First Mortgage") to secure theprincipal amount of $12,750,000. On the same day, theBorrower and Lender [*3] executed a Loan Agreement.This agreement required that Borrower place certain ofthe funds advanced by the Lender into interest bearingescrow accounts; $1,750,000, the "PIP Deposit" and$122,750, "Immediate Repair Work Deposit." Thesefunds were to be disbursed in accordance with the termsof the First Repair Escrow Agreement ("First RepairAgreement").

The Loan Agreement also provided for an"Additional PIP Deposit" of $1,750,000 (held back at thetime of the January 30, 2007 disbursement) to bedisbursed by the Lender on July 30, 2007 and placed inan escrow account. This $1,750,000 was secured by aMortgage, Assignment of Leases and Rents and SecurityAgreement in of LBH ("Second Mortgage"). The Firstand Second Mortgages granted to LBH a security interestin certain property known as Strathallan Hotel, at 550East Avenue, Rochester, New York (the "premises"),These funds were to be disbursed in accordance with theSecond Repair Escrow Agreement (containing essentiallythe same terms as the First Repair Escrow Agreement),also executed January 30, 2007.

On or about May 22, 2008, LBH and Sasco, andothers, entered into a Master Participation Agreement

that, among other things, assigned [*4] to Sasco aparticipation interest in the Note and Mortgages, givingSasco a beneficial interest in the mortgages while LBHretained legal title as the holder of the Consolidated Noteand mortgages.

To further secure the Consolidated Note, on January30, 2007, Genwood executed a Security Agreement("Security Agreement") granting to LBH a securityinterest in any and all items of personal property,furniture, fixtures and equipment then owned orthereafter acquired by Genwood, as more specifically setforth in Ex. B of the Security Agreement ("Collateral").On June 1, 2009, LBH perfected its security interest inthe Collateral with a filing of a UCC Financing Statementwith NYS Department of State. TriMont Real EstateAdvisors, Inc., provides loan servicing services to Sascoconcerning the Consolidated Note and First and SecondMortgage. TriMont's Vice President has submitted anaffidavit averring that the Borrower failed to make certaininterest payments due and owing on December 1, 2008and failed to make the payments each month thereafter.Due demand was made, but payment was notforthcoming. The loan matured on February 1, 2010. Atthat time, the Borrower similarly failed to make [*5]payment in full of the outstanding principal and accruedinterest due and owing under the Consolidated Note.Plaintiffs alleges that $14,600,000 remains due as of July13, 2010, plus interest and late charges.

It is well settled that "the proponent of a summaryjudgment motion must make a prima facie showing ofentitlement to judgment as a matter of law, tenderingsufficient evidence to demonstrate the absence of anymaterial issues of fact." Alvarez v. Prospect Hosp., 68N.Y.2d 320, 324, 501 N.E.2d 572, 508 N.Y.S.2d 923(1986) (citations omitted). See also, Potter v. Zimber, 309A.D.2d 1276, 764 N.Y.S.2d 736 (4th Dept. 2003)(citations omitted). "Once this showing has been made,the burden shifts to the nonmoving party to produceevidentiary proof in admissible form sufficient toestablish the existence of material issues of fact thatrequire a trial for resolution." Giuffrida v. Citibank Corp.,100 N.Y.2d 72, 81, 790 N.E.2d 772, 760 N.Y.S.2d 397(2003), citing Alvarez, 68 N.Y.2d at 324. "Failure tomake such showing requires denial of the motion,regardless of the sufficiency of the responsive papers."Wingrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851,853, 476 N.E.2d 642, 487 N.Y.S.2d 316 (1985) (citationomitted). See also, Hull v. City of North Tonawanda, 6

Page 22011 N.Y. Misc. LEXIS 6154, *1

A.D.3d 1142, 1142-43, 775 N.Y.S.2d 656 (4th Dept.2004). [*6] When deciding a summary judgment motion,the evidence must be viewed in the light most favorableto the nonmoving party. See Russo v. YMCA of GreaterBuffalo, 12 A.D.3d 1089, 784 N.Y.S.2d 782 (4th Dept.2004). The court's duty is to determine whether an issueof fact exists, not to resolve it. See Barr v. County ofAlbany, 50 N.Y.2d 247, 406 N.E.2d 481, 428 N.Y.S.2d665 (1980); Daliendo v Johnson, 147 A.D.2d 312, 317,543 N.Y.S.2d 987 (2nd Dept. 1989) (citations omitted).

"In order to establish prima facie entitlement tosummary judgment in a foreclosure action, a plaintiffmust submit the mortgage and unpaid note, along withevidence of default." Capstone Bus. Credit, LLC v.Imperia Family Realty, LLC, 70 A.D.3d 882, 883, 895N.Y.S.2d 199 (2d Dept. 2010).

Here, plaintiffs have established prima facieentitlement to summary judgment by presenting theConsolidated Note and First and Second Mortgages, andan attestation as to the default. Defendant Genwoodfailed to appear in this action.

Defendant M&T served a Verified Answer withCounterclaim and Cross-Claim. M&T alleges that itentered into an agreement with Driftwood Management,LLC, acting in its capacity as managing agent forGenwood to perform certain work in connection withimprovements to the Premises. M&T was to [*7] be paid$348,300. M&T alleges that it performed services valuedat $299,500 between June 25, 2008 and October 6, 2008for which Genwood has failed to pay. On April 8, 2009,M&T filed a mechanics lien in the amount of $299,500.The lien was extended on March 18, 2010. By itscounterclaim and cross-claim, M&T seeks adetermination it has a valid and subsisting lien upon theinterst of the owner of the premises, a determination ofthe amount due under its mechanics lien, enforcement ofthe lien, and a determination of the validity, extent andpriority of the claims and liens asserted in this action.

The consolidated mortgage was filed on February 6,2007. The second mortgage was filed on August 2, 2007.Nevertheless, as noted, defendant M&T contends that itsmechanics lien, originally filed on April 8, 2009 andsubsequently extended, is superior to plaintiffs'mortgages, M&T contends that the First and SecondMortgage were made pursuant to a building loanagreement, which was not filed pursuant to Lien Law §22, and that, therefore, its mechanics lien is superior.

A building loan contract is defined under the LienLaw at §2(13).

The term "building loan contract," whenused in this chapter, [*8] means a contractwhereby a party thereto, in this chaptertermed "lender," in consideration of theexpress promise of an owner to make animprovement upon real property, agrees tomake advances to or for the account ofsuch owner to be secured by a mortgageon such real property, whether suchadvances represent moneys to be loaned orrepresent moneys to be paid in purchasingfrom or in selling for such owner bonds orcertificates secured by such mortgageupon such real property . . . .

Lien Law §2(14) defines a building loan mortgage.

The term "building loan mortgage,"when used in this chapter, means amortgage made pursuant to a building loancontract and includes an agreementwherein and whereby a building loanmortgage is consolidated with existingmortgages so as to constitute one lienupon the mortgaged property.

Lien Law §22 requires the filing of the building loancontract with the County Clerk. "If not so filed theinterest of each party to such contact in the real propertyaffected thereby, is subject to the lien and claim of aperson who shall thereafter file a notice of lien under thischapter." Lien Law § 22. The purpose of this section is"to readily enable a contractor [*9] to learn exactly whatsum the loan in fact made available to the owner of thereal estate for the project." Nanuet Nat'l Bank v.Eckerson Terrace, Inc., 47 N.Y.2d 243, 391 N.E.2d 983,417 N.Y.S.2d 901 (1979). If § 22 applies to the LoanAgreement, then plaintiffs mortgages would besubordinate to the M&T's subsequently filed mechanicslien as it is undisputed that plaintiffs did not file anydocuments pursuant to § 22. This section imposes a"subordination penalty" for failure by the lender tocomply with its requirements. Nanuet Nat'l Bank v.


Eckerson Terrace, Inc., 47 N.Y.2d at 248. To the extentthat this outcome may be harsh, "it must be understoodthat we are here dealing not with equitable redress, butwith a statutorily imposed penalty." Atlantic Bank v.Forrest House Holding Co., 234 A.D.2d 491, 492, 651N.Y.S.2d 607 (2d Dept. 1996).

Plaintiff contends that the Consolidated Note, LoanAgreement, First and Second Mortgage do not contain anexpress promise on the part of borrower, or an expresspromise on the part of LBH to fund the construction of abuilding or improvements as is required under thedefinition of a building loan contract in the Lien Law.Plaintiffs contend that the game is true for the LoanAgreement. According [*10] to plaintiffs, there are noexpress agreements as required under Lien Law. "Rather,the Loan Agreement merely requires that Borrower placecertain funds advanced by LBH in interest bearingescrow accounts, including the "Immediate Repair WorkDeposit," "PIP Deposit" and "Additional PIP Deposit," tobe disbursed in accordance with the First and SecondRepair Agreement." Memorandum of Law in Support ofPlaintiffs' Renewed Motion for Summary Judgment, p.11. Accordingly, plaintiffs assert that there is no buildingloan contract and the requirements of Lien Law § 22 donot apply.

Defendant contends that the Loan Agreement, readtogether with the First and Second Repair EscrowAgreements, is a building loan contract. Plaintiffs arguethat the First and Second Repair Agreements cannot beconsidered when determining if the Loan Agreement is abuilding loan contract as those documents aresupplemental to the agreement itself and cannot changethe nature of the transaction.

The court finds that the Loan Agreement and Firstand Second Repair Escrow Agreements must be readtogether for purposes of determining whether this is abuilding loan contract. In general, written contractsexecuted simultaneously [*11] and for the same purposemust be read and interpreted together. Nau v. Vulcan Rail& Constr, Co., 286 N.Y. 188, 197, 36 N.E.2d 106 (1941);Manufacturers & Traders Trust Co. v. Erie County Indus.Dev. Agency, 269 A.D.2d 871, 872, 703 N.Y.S.2d 636[4th Dept. 2000]); see also 22 N.Y. Jur.2d, Contracts§255 ("In the absence of anything to indicate the contraryintention, instruments executed at the same time, by thesame parties, for the same purpose, and in the course ofthe same transaction will be read and interpreted together,

it being said that they are, in the eyes of the law, oneinstrument"); see also, BWA Corp. v. Alltrans Exp.U.S.A., Inc., 112 A.D.2d 850, 493 N.Y.S.2d 1 (1st Dept.1985) (holding that in the absence of anything to indicatea contrary intention, "where several instrumentsconstitute part of the same transaction, they must beinterpreted together"). The Loan Agreement, First RepairEscrow Agreement and Second Repair EscrowAgreement were executed contemporaneously on January30, 2007. Further, each of these agreements was executedas part of the Consolidated Note secured by the First andSecond Mortgage. Simply, these documents were in fact"executed by the same parties, for the same purpose, andin the course [*12] of the same transaction." 22 N.Y.Jur.2d, Contracts §255.

Plaintiffs next argue that, even if the LoanAgreement, First Repair Escrow Agreement and SecondRepair Escrow Agreement are read together, the First andSecond Repair Escrow Agreements do not contain theessential details to evidence a building loan agreement.The court disagrees. These loan documents "on [their]face comport[] with the definition of a building loancontract." Altshuler Shaham Provident Funds, Ltd, v.GML Tower LLC, 28 Misc.3d 475, 479-480, 900N.Y.S.2d 846 (Sup. Ct. 2010), aff'd for reasons statedbelow, Altshuler Shaham Provident Funds. Ltd. v GmlTower LLC, 83 A.D.3d 1563, 921 N.Y.S.2d 601 (4thDept. 2011). The Loan Agreement provides at paragraph7(c) that the borrower has deposited $1,750,000 (the "PIPDeposit") and $122,750 (the "Immediate Repair WorkDeposit") in escrow accounts, that "Lender is funding thePIP Deposit and Immediate Repair Work Deposit, andthat the funds were to be disbursed in accordance with theFirst Repair Escrow Agreement. At paragraph 8(d), theLoan agreement provides that an additional sum of$1,750,000 (the "Additional PIP Deposit") "funded by theLender" is to be deposited in escrow no later that sixmonths after [*13] the date of the Loan Agreement in"connection with the further performance by Borrower ofthe repair and renovation work required under theFranchise Agreement."

The First Repair Escrow Agreement "requires thatthe Borrower perform (a) the repairs and deferredmaintenance at the Project listed on Exhibit A hereto(collectively, the "PIP Work") and Exhibit B hereto(collectively, the "Immediate Repair Work"). First RepairEscrow Agreement, 3rd Whereas Clause, p. 1 (emphasissupplied). The First Repair Escrow Agreement also


provides that $1,750,000 will be deposited in the "PIPEscrow" and $122,750 in the "Immediate Repair Escrow"to be disbursed as provided the First Repair EscrowAgreement. Id. The purpose of the deposits is "[t]o secureBorrower's obligation to complete the Work [PIP Workand Immediate Repair Work]." First Repair EscrowAgreement, ¶1(a)(emphasis supplied). The escrowsestablished "shall be used exclusively in respect of thePIP Work and the Immediate Repair Work." Id., at ¶3.The First Repair Escrow provides also that the lendershall release funds from the escrow accounts for workcovered under the agreement and provided the amountpayable is reasonable.

The Second [*14] Repair Escrow, also executedJanuary 30, 2007, provides for an additional sum of$1,750,000, secured by the Second Mortgage, to beplaced in an escrow account to also secure borrower'sobligation to complete the PIP work and that this moneyshall be used exclusively to complete the work.

Plaintiffs argue that the PIP Work, found at ExhibitA to both the First and Second Repair EscrowAgreements, is merely a list of standards required toensure compliance with the hotel's franchise agreement.According to plaintiffs, it does not mandate what repairsmust be made, but only states the condition the hotelmust be in, and does not state the amounts allocated toeach item. Further, spending of any funds in the PIPEscrow was within the discretion of the Borrower.

Plaintiffs' position is not supported by the the termsof the First and Second Repair Escrow Agreements. Asthe "Lender requires that Borrower perform [the PIPWork and Immediate Repair Work [the "Work"]" and themoney in the escrow accounts was to ensure theBorrower's "obligation" to complete the Work. First andSecond Repair Escrow Agreements, 3rd Whereas Clause,and ¶1(a).

Plaintiffs next argue that there was no timeline forcompletion [*15] of the work. The court does not agree.The Work is to be completed no later than 12 monthsafter the contract date, January 30, 2007, and in the caseof the Immediate Repair Work, no later than six monthsafter the contract date. Id., at ¶ 2(a). To add to the pointabove, that the PIP Work was to be completed no laterthan 12 months supports M&T's position that the workwas not discretionary.

Plaintiffs also argue that because the funds pursuant

to the consolidated mortgage ($12,850,000) weredisbursed all on the same day, January 30, 2007, the$12,850,000 loan cannot be a building loan because suchloans must be disbursed in installments, not in a lumpsum. Plaintiffs make the same argument as to the second$1,750,000 which was disbursed on July 30, 2007.

While it is true that the entire amount of the$12,850,000 loan secured by the Consolidated Mortgagewas in a sense disbursed on January 30, 2007, the moneywas not made available to the Borrower in a lump sum.By the terms of the Loan Agreement, and First andSecond Escrow Agreements, the borrower was requiredto immediately fund the escrow accounts described inthose agreements with part of the funds disbursed on thatdate. The [*16] funds could not be used for any otherpurpose than the PIP Repair Work and Immediate RepairWork, and could only be disbursed by permission of theLender upon request of the borrower as the Work wascompleted. Use of this escrow arrangement, which somecommentators have described as an attempt by lenders tocircumvent the Lien Law §22 requirements,1 still requiresperiodic disbursement as the Work is completed by theLender of the monies dedicated to completion of theWork.

1 "Some lenders try to avoid the Lien Lawrestrictions by disbursing the entire loan proceedsat closing into an escrow account, and thendisbursing from the escrow account to pay theborrower's construction costs, on the theory thatthe loan is not a 'building loan' since the lender isnot making advances after the closing. Thisescrow arrangement is not recommended since itmay not comply with the Lien Law." NY CLSLien §22 (Matthew Bender)(available on LEXIS)Practice Insights: Use of Building LoanAgreements and Mortgages, by Brook Boyd, Esq.

In accordance with the above, th(c) court deniesplaintiffs' motion to dismiss the counterclaim of M&Tand to sever its crossclaim. CPLR 3212(b) states:

If it shall appear [*17] that any partyother than the moving party is entitled to asummary judgment, the court may grantsuch judgment without the necessity of across-motion.

See also, Dickson v. Slezak, 73 A.D.3d 1249, fn. 3, 902


N.Y.S.2d 206 (3d Dept. 2010); Perkins v. Kapsokefalos,57 A.D.3d 1189, 1191, 869 N.Y.S.2d 667 (3d Dept.2008). The authority extends, however, only to a cause ofaction or issue before the court. See Dunham v. HilcoConstr. Co., Inc., 89 N.Y.2d 425, 430, 676 N.E.2d 1178,654 N.Y.S.2d 335 (1996). Searching the record, the courtfinds that, by operation of Lien Law § 22, M&T'smechanics lien, originally filed April 8, 2010, has priorityover plaintiffs' First and Second Mortgages.

Therefore, subject to M&T's mechanics lien,plaintiffs are granted summary judgment on itsforeclosure cause of action as to the mortgages andenforcement of the security agreement. The matter willbe referred to a referee upon submission of an appropriateorder. Plaintiffs are granted their relief requesting that

John and Mary Doe be stricken as parties.

Genwood's motion to quash the subpoena is renderedmoot by the above decision finding its lien is superior tothat of plaintiffs.

SO ORDERED.

/s/ Kenneth R. Fisher

KENNETH R. FISHER

JUSTICE SUPREME COURT

DATED: October 20, 2011

Rochester, [*18] New York


Exhibit OO: Aspro Mechanical Contracting, Inc. v.Fleetbank, N.A. 1 N.Y.3D 324 773 N.Y.S. 2D 735

3 of 52 DOCUMENTS

Aspro Mechanical Contracting, Inc., et al., Respondents, v. Fleet Bank, N.A.,Appellant.

No. 7

COURT OF APPEALS OF NEW YORK

1 N.Y.3d 324; 805 N.E.2d 1037; 773 N.Y.S.2d 735; 2004 N.Y. LEXIS 140

January 7, 2004, ArguedFebruary 12, 2004, Decided

SUBSEQUENT HISTORY:Reargument denied by Aspro Mech. Contr. v. Fleet Bank,N.A., 2 N.Y.3d 760, 811 N.E.2d 39, 2004 N.Y. LEXIS500, 778 N.Y.S.2d 777 (N.Y., Mar. 25, 2004)

PRIOR HISTORY: Appeal, by permission of theCourt of Appeals, from a judgment of the Supreme Court,Kings County (Lewis L. Douglass, J.), entered February25, 2003. The Supreme Court, pursuant to the parties'stipulation, awarded plaintiffs damages against defendantin the total sum of $ 1,904,923.48. The appeal brings upfor review a prior nonfinal order of the AppellateDivision of the Supreme Court in the Second JudicialDepartment, entered May 20, 2002. The AppellateDivision had affirmed an order of the Supreme Court,Kings County (Gerald S. Held, J.), which grantedplaintiffs' motion for summary judgment on the issue ofliability and denied defendant's cross motion forsummary judgment dismissing the complaint.Aspro Mech. Contr. v. Fleet Bank, 293 A.D.2d 97, 742N.Y.S.2d 361, 2002 N.Y. App. Div. LEXIS 5265 (N.Y.App. Div. 2d Dep't, 2002) affirmed

DISPOSITION: Judgment of trial court and order ofthe appellate division affirmed.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellant mortgagee

appealed, as to liability, from the affirmance by theAppellate Division (New York) of the trial court's entryof summary judgment in favor of respondentsubcontractors in the subcontractors' suit alleging that themortgagee had diverted trust funds by paying itself priorto paying the subcontractors' claims.

OVERVIEW: The owner assigned its rights to paymentsfrom the city under a turnkey contract of sale to themortgagee as additional security for a construction loan.The mortgagee argued that the payments it made to itselfwere permissible as its recorded loans were superior tothe subcontractors' claims. The state's highest court heldthat the payments were trust assets under N.Y. Lien Lawart. 3-A subject to the subcontractors' claims. Theassignment from the owner rendered the mortgagee astatutory owner-trustee. As a statutory trustee, themortgagee was obligated to act as a fiduciary manager ofthe funds. The mortgagee's application of the trust assetsto repay its loans, without acknowledging its status astrustee and providing notice to trust beneficiaries of thetransfer, constituted a breach of fiduciary duty. Had themortgagee filed a notice of lending regarding its use ofthe trust assets to repay itself, the beneficiaries couldhave ascertained that the trust assets were being depletedand the mortgagee was a trustee acting as both transferorand transferee of those funds. Nothing in the filings reliedupon by the mortgagee imparted this information to thetrust beneficiaries.

Page 1

OUTCOME: The judgments entered by the trial courtand the affirmance by the intermediate court wereaffirmed.

CORE TERMS: trust assets, notice, trust beneficiaries,mortgage, beneficiary, trust funds, lending, repay,subcontractor, contractor, diversion, turnkey, buildingloan mortgage, special proceeding, fiduciary, repayment,lender, owed, Report of NY Law, construction loan,assigned, laborer, loan agreement, fiduciary duty,affirmative defenses, owner-trustee, depletion, diverted,paying, summary judgment


Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN1] N.Y. Lien Law art. 3-A creates trust funds out ofcertain construction payments or funds to assure paymentof subcontractors, suppliers, architects, engineers,laborers, as well as specified taxes and expenses ofconstruction. N.Y. Lien Law §§ 70, 71.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN2] The appellate court has repeatedly recognized thatthe primary purpose of N.Y. Lien Law art. 3-A and itspredecessors is to ensure that those who have directlyexpended labor and materials to improve real property ora public improvement at the direction of the owner or ageneral contractor receive payment for the work actuallyperformed.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN3] Enactment of the trust fund provisions has beenprompted by the frequency of cases in which laborers andmaterialmen were in fact not paid. The trust concept isintended precisely to forbid that an owner, contractor orsubcontractor act merely as entrepreneur and is intendedto require that he act, instead, as fiduciary manager of thefixed amounts provided for the operation.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN4] The New York Lien Law establishes that

designated funds received by owners, contractors andsubcontractors in connection with improvements of realproperty are trust assets and that a trust begins when anyasset thereof comes into existence, whether or not thereshall be at that time any beneficiary of the trust. N.Y.Lien Law § 70(1) and (3).

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN5] Funds received by an owner under building loancontracts and building loan mortgages are trust assets andthe statute requires owner-trustees to apply such assetsfor payment of the "cost of improvement." N.Y. LienLaw §§ 70(5) and 71(1). Cost of improvement is definedin N. Y. Lien Law § 2(5) to encompass expendituresincurred by the owner in paying the claims of acontractor, an architect, engineer or surveyor, asubcontractor, laborer and materialman, arising out of theimprovement, and shall also include sums paid todischarge building loan mortgages whenever recorded.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN6] The use of trust assets for a non-trustpurpose--that is, a purpose outside the scope of the costof improvement--is deemed a diversion of trust assets,whether or not there are trust claims in existence at thetime of the transaction, and if the diversion occurs by thevoluntary act of the trustee or by his consent such act orconsent is a breach of trust. N.Y. Lien Law § 72.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN7] N.Y. Lien Law § 74(1) expressly vests discretionin the trustee to determine the order and manner ofpayment of any trust claims and to apply any trust assetto any purpose of the trust.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN8] The New York Lien Law incorporates amechanism for trustees to alert beneficiaries to thedistribution of trust assets to repay advances made bylenders. Trustees or lender-transferees may file a "noticeof lending" to protect the lender's right to repayment fromtrust funds (N.Y. Lien Law § 73). Such notice must befiled in the county clerk's office in the "lien docket" or

Page 21 N.Y.3d 324, *; 805 N.E.2d 1037, **;

773 N.Y.S.2d 735, ***; 2004 N.Y. LEXIS 140

other official record and indexed by the name of thetrustee to whom the advances are made. Section 73(3)(a).

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN9] A "notice of lending" is to be filed within fivedays of the payment and sets forth the names andaddresses of the persons making the advances and towhom or on whose behalf they are made, the date of anyadvances made prior to the filing for which the filing isintended to be effective and the maximum balance ofadvances outstanding to be permitted by the lenderpursuant to the notice. N.Y. Lien Law § 73(3)(b).

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN10] The filing provisions in N.Y. Lien Law § 73promote the legislative intent to assure public notice ofany transaction of the owner, contractor or subcontractorthat may lead to depletion of funds available for futuretrust claims, even where the depletion merely repaysadvances that were in fact used to pay trust claimsaccruing at an earlier date. Such record notice providespersons who furnish materials and services in reliance onthe trust assets receivable by the trustee at a later stage ofthe improvement notice that those assets have beenanticipated for current expense.

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN11] Pursuant to N.Y. Lien Law § 73, the proper filingof a "notice of lending" is an affirmative defense to anaction charging a trustee with a diversion of trust assetsor an action to recover diverted assets from a transferee.In an action against a trustee, the notice of lendingevidences that the alleged diversion was made as securityfor or in consideration of or in repayment of advancesmade to him as trustee or on his behalf as trustee, and thatsuch advances were actually applied for a purpose of thetrust. Section 73(2).

Real Property Law > Nonmortgage Liens > Mechanics'Liens[HN12] A statutory trustee is obligated to act as afiduciary manager of the turnkey contract funds, owes thebeneficiaries a duty of loyalty, and is required toadminister the trust solely in the interest of the

beneficiaries.

HEADNOTES

Liens -- Trusts for Laborers and Materialmen --Diversion of Trust Assets

Defendant mortgagee bank, having taken anassignment of a turnkey contract of sale as security for aconstruction loan, was liable as a statutory trustee underLien Law article 3-A for the unpaid claims of plaintiffsubcontractors. The funds owed under the contract weretrust assets subject to the rights of trust beneficiaries, andthe direct payment of the sale proceeds to defendantrendered defendant a statutory owner-trustee obligated toadminister the trust solely in the interest of thebeneficiaries. Defendant's application of the trust assetsto repay its construction loan--without acknowledging itsstatus as trustee and providing notice to trust beneficiariesof the transfer--constituted a breach of its fiduciary duty.The filing by defendant of a notice of lending regardingits use of the trust assets to repay itself would havesatisfied defendant's duty to provide notice to the trustbeneficiaries of its use of trust assets to discharge thedebt.

COUNSEL: Cleary, Gottlieb, Steen & Hamilton, NewYork City (Evan A. Davis, Mitchell A. Lowenthal andRupa Mitra of counsel), for appellant. I.Defendant-appellant was not required to file a notice oflending. (United Lakeland A.C. Co. vAhneman-Christiansen, Inc., 33 Misc. 2d 606, 226N.Y.S.2d 532, 18 A.D.2d 1022, 239 N.Y.S.2d 38; Heardv Cuomo, 80 N.Y.2d 684, 610 N.E.2d 348, 594 N.Y.S.2d675; Matter of ELRAC, Inc. v White, 299 A.D.2d 546,750 N.Y.S.2d 641; Matter of Kamhi v Planning Bd. ofTown of Yorktown, 59 N.Y.2d 385, 452 N.E.2d 1193, 465N.Y.S.2d 865.) II. The lower courts failed to construe thestatute in light of all its purposes, including its purpose tostrike a balance. (Matter of Judge Rotenberg Educ. Ctr. vMaul, 91 N.Y.2d 298, 693 N.E.2d 200, 670 N.Y.S.2d173; Majewski v Broadalbin-Perth Cent. School Dist., 91N.Y.2d 577, 696 N.E.2d 978, 673 N.Y.S.2d 966; Matterof Duell v Condon, 84 N.Y.2d 773, 647 N.E.2d 96, 622N.Y.S.2d 891; Le Drugstore Etats Unis v New York StateBd. of Pharm., 33 N.Y.2d 298, 307 N.E.2d 249, 352N.Y.S.2d 188; New York State Bridge Auth. v Moore, 299N.Y. 410, 87 N.E.2d 432.)

Zisholtz & Zisholtz, LLP, Mineola (Stuart S. Zisholtz ofcounsel), for respondents. I. Appellant failed to file a

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notice of assignment and a notice of lending. (NationalSur. Corp. v Fishkill Natl. Bank, 61 Misc. 2d 579, 306N.Y.S.2d 122, 37 A.D.2d 537, 322 N.Y.S.2d 980;Lincoln Natl. Bank of City of N.Y. v Pierce Co., 228 N.Y.359, 127 N.E. 253; American Blower Corp. v JamesTalcott, Inc., 10 N.Y.2d 282, 176 N.E.2d 833, 219N.Y.S.2d 263; Adirondack Trust Co. v Bien & Assoc.,168 Misc. 2d 919, 645 N.Y.S.2d 288; Edison Elec.Illuminating Co. of Brooklyn v Frick Co., 221 N.Y. 1,116 N.E. 369; General Ins. Co. of Am. v Tilcon N.Y., 294A.D.2d 195, 741 N.Y.S.2d 693.) II. Appellant divertedtrust funds. (Canron Corp. v City of New York, 214A.D.2d 115, 631 N.Y.S.2d 642; Raisler Corp. v Uris 55Water St. Co., 91 Misc. 2d 217, 397 N.Y.S.2d 668; EljamMason Supply v I.F. Assoc. Corp., 84 A.D.2d 720, 444N.Y.S.2d 96; Glens Falls Ins. Co. v Schwab Bros.Trucking, 55 Misc. 2d 324, 285 N.Y.S.2d 204; New YorkNatl. Bank v Primalto Dev. & Constr. Co., 270 A.D.2d22, 703 N.Y.S.2d 480; Caristo Constr. Corp. v DinersFin. Corp., 21 N.Y.2d 507, 236 N.E.2d 461, 289N.Y.S.2d 175; West-Fair Elec. Contrs. v Aetna Cas. &Sur. Co., 87 N.Y.2d 148, 661 N.E.2d 967, 638 N.Y.S.2d394; Naiztat Iron Works v Tri-Neck Constr. Corp., 62Misc. 2d 228, 308 N.Y.S.2d 427; Glazer v Alison HomesCorp., 62 Misc. 2d 1017, 309 N.Y.S.2d 381; Schwadronv Freund, 69 Misc. 2d 342, 329 N.Y.S.2d 945.) III.Appellant's attempt to raise new issues on appeal shouldnot be countenanced. (Sacks v Stewart, 75 A.D.2d 536,427 N.Y.S.2d 20; Fonda v Nationwide Mut. Fire Ins. Co.,99 A.D.2d 680, 472 N.Y.S.2d 53; Broida v Bancroft, 103A.D.2d 88, 478 N.Y.S.2d 333.)

JUDGES: Opinion by Judge Graffeo. Chief Judge Kayeand Judges George Smith, Ciparick, Rosenblatt and Readconcur; Judge Robert Smith took no part.

OPINION BY: GRAFFEO

OPINION

[***735] [**1037] [*326] Graffeo, J.

In 1989, Berry Street Corporation entered into aturnkey contract of sale with the New York City HousingAuthority (NYCHA) whereby Berry Street would acquiretitle to three parcels of land in Brooklyn, constructresidential buildings on the parcels and convey title to theimproved property to NYCHA. The contract specifiedperiodic payments from NYCHA to Berry Street and itsgeneral contractor as the improvements were completed.

Norstar Bank made a construction loan to BerryStreet in 1992 as evidenced by a building and project loanagreement, building loan mortgage and project loanmortgage. The loan agreement and mortgages were filedwith the Kings County City Register's Office inaccordance with section 22 of the Lien Law and themortgages contained the requisite Lien Law § 13covenant stating that the mortgages were subject to thetrust provisions of that section.

As additional security for the loan, Berry Streetsimultaneously assigned all of its right, title and interestin the turnkey contract to Norstar (hereinafter referred toas Fleet, Norstar's successor in interest and the defendanthere). In conjunction with the assignment, NYCHAagreed to make payments directly to Fleet until Fleetnotified NYCHA that Fleet's loans to Berry Street werefully repaid. The filed mortgages revealed that BerryStreet had assigned its turnkey contract to Fleet;[**1038] [***736] however, the specific rights andresponsibilities assigned were not disclosed. Theassignment itself was not filed.

NYCHA purchased the three sites and theirimprovements from Berry Street over the course of threeyears. Because Berry Street had not yet fully repaid theconstruction loan to Fleet, NYCHA paid the purchaseamounts for each improved parcel directly to Fleet. Fleetapplied these amounts to the debt owed it by Berry Streetunder the loan agreement and eventually discharged itsmortgages on the properties.

Plaintiffs --individuals and entities who hadsubcontracted with Berry Street to provide labor, servicesand materials for the project--commenced a specialproceeding to recover Lien Law article 3-A [*327] trustfunds allegedly diverted by Fleet and NYCHA. Fleetmoved to dismiss the special proceeding, arguing that itsstatus in the transaction was solely that of alender-mortgagee and not a trustee subject to article 3-Aof the Lien Law. Plaintiffs opposed the motion andcross-moved to amend the petition to add claimspertaining to Berry Street's assignment of its turnkeycontract rights to Fleet, which plaintiffs alleged theylearned of only upon receipt of NYCHA's answer in thespecial proceeding.

Supreme Court denied Fleet's motion to dismiss andgranted plaintiffs' cross motion to file an amendedpetition. Ultimately, the special proceeding wasdismissed without prejudice, and plaintiffs commenced

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this action pursuant to Lien Law § 77. 1 In the complaint,plaintiffs alleged that they were owed monies on theirsubcontracts and that Fleet had diverted trust funds bypaying itself prior to paying plaintiffs' claims. Plaintiffsurged that Fleet's failure to file a notice of assignment ora notice of lending deprived Fleet of any affirmativedefenses it might otherwise have had and sought torecover for Fleet's "violation of [its] fiduciaryrelationship under the trust."

1 Upon plaintiffs' motion, the action wascertified as a class action.

After denial of its motion to dismiss the new action,Fleet answered and raised numerous affirmative defenses.As it had contended during the special proceeding, Fleetagain asserted that it was "not a statutory trustee and thefunds paid to Fleet do not constitute trust assets" and thatplaintiffs' claims were barred by virtue of Fleet's"superior mortgage interest." Plaintiffs moved forsummary judgment on the issue of liability and Fleetcross-moved for summary judgment dismissing thecomplaint.

Supreme Court granted plaintiffs' motion, deniedFleet's cross motion and ordered a trial on damages. 2 OnFleet's appeal, the Appellate Division affirmed, holdingthat Fleet's repayment to itself of the loans made to BerryStreet was a diversion of trust assets. The partiesstipulated to damages and judgment was entered forplaintiffs in the amount of $ 1,904,923.48. Fleet nowappeals the judgment, bringing up for review theAppellate Division's order of affirmance.

2 Supreme Court granted NYCHA's motion forsummary judgment dismissing the claims againstit so it is no longer a party in this action.

In this appeal, Fleet no longer disputes that thepayments it received via the assignment constitutedarticle 3-A trust assets [*328] and concedes its trusteestatus as a result of the assignment. Fleet now argues thatits self-payment--at a time when it contended that thefunds were not trust assets--was nevertheless permissiblebecause it used the money to pay its properly [**1039][***737] recorded secured loans, which were superior toplaintiffs' claims pursuant to the Lien Law's statutorypriority provisions.

The Lien Law Trust Provisions

Article 3-A of the Lien Law [HN1] creates "trustfunds out of certain construction payments or funds toassure payment of subcontractors, suppliers, architects,engineers, laborers, as well as specified taxes andexpenses of construction" (Caristo Constr. Corp. vDiners Fin. Corp., 21 N.Y.2d 507, 512, 236 N.E.2d 461,289 N.Y.S.2d 175 [1968]; see Lien Law §§70, 71).[HN2] We have repeatedly recognized that the "primarypurpose of article 3-A and its predecessors [is] 'to ensurethat "those who have directly expended labor andmaterials to improve real property [or a publicimprovement] at the direction of the owner or a generalcontractor" receive payment for the work actuallyperformed" (Matter of RLI Ins. Co. v New York StateDept. of Labor, 97 N.Y.2d 256, 264, 766 N.E.2d 934, 740N.Y.S.2d 272 [2002] [quoting Canron Corp. v City ofNew York, 89 N.Y.2d 147, 155, 674 N.E.2d 1117, 652N.Y.S.2d 211 (1996); see also West-Fair Elec. Contrs. vAetna Cas. & Sur. Co., 87 N.Y.2d 148, 156-157, 661N.E.2d 967, 638 N.Y.S.2d 394 [1995]). As the LawRevision Commission noted in its 1959 Reportrecommending numerous amendments to the law,

[HN3] "enactment of the trust fundprovisions was prompted by the frequencyof cases in which laborers andmaterialmen were in fact not paid. Thetrust concept was intended precisely toforbid that an owner, contractor orsubcontractor act merely as entrepreneurand was intended to require that he act,instead, as fiduciary manager of the fixedamounts provided for the operation" (1959Report of NY Law Rev Commn, at 214,reprinted in 1959 NY Legis Doc No. 65, at30).

To ensure this end, [HN4] the Lien Law establishesthat designated funds received by owners, contractors andsubcontractors in connection with improvements of realproperty are trust assets and that a trust begins "when anyasset thereof comes into existence, whether or not thereshall be at that time any beneficiary of the trust" (LienLaw § 70 [1], [3]; see City of New York v Cross BayContr. Corp., 93 N.Y.2d 14, 19, 709 N.E.2d 459, 686N.Y.S.2d 750 [1999]. [HN5] ). Funds received by anowner under building loan contracts and building loan[*329] mortgages are trust assets and the statute requiresowner-trustees to apply such assets for payment of the

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"cost of improvement" (see Lien Law § 70 [5]; § 71 [1]).Cost of improvement is defined in the Lien Law toencompass "expenditures incurred by the owner in payingthe claims of a contractor, an architect, engineer orsurveyor, a subcontractor, laborer and materialman,arising out of the improvement, . . . and shall also include. . . sums paid to discharge building loan mortgageswhenever recorded" (id. at § 2 [5]). [HN6] The use oftrust assets for a nontrust purpose--that is, a purposeoutside the scope of the cost of improvement--is deemed"a diversion of trust assets, whether or not there are trustclaims in existence at the time of the transaction, and ifthe diversion occurs by the voluntary act of the trustee orby his consent such act or consent is a breach of trust"(Lien Law § 72).

The Lien Law further imposes duties upon trustees inthe operation of the trust. A statutory trustee mustmaintain books and records of the trust including entriesfor trust assets receivable, trust accounts payable, trustfunds received and trust payments made with trust assets,and make those records available for inspection bybeneficiaries (see id. at §§75, 76). In addition, the recordsmust reflect any [**1040] [***738] "[t]ransfers inrepayment of or to secure advances made pursuant to a'Notice of Lending" "(id. at § 75 [3] [E]). [HN7] Thestatute expressly vests discretion in the trustee "todetermine the order and manner of payment of any trustclaims and to apply any trust asset to any purpose of thetrust" (id. at § 74 [1]).

Of special importance in this case, [HN8] the LienLaw also incorporates a mechanism for trustees to alertbeneficiaries to the distribution of trust assets to repayadvances made by lenders (see Postner & Rubin, NewYork Construction Law Manual §9.76, at 362). Trusteesor lender-transferees may file a "Notice of Lending" to"protect the lender's right to repayment from trust funds"(id.; see Lien Law § 73). Such notice must be filed in thecounty clerk's office in the "lien docket" or other officialrecord and indexed by the name of the trustee to whomthe advances are made (see Lien Law § 73 [3] [a]). [HN9]The notice is to be filed within five days of the paymentand sets forth the names and addresses of the personsmaking the advances and to whom or on whose behalfthey are made, the date of any advances made prior to thefiling for which the filing is intended to be effective and"the maximum balance of advances outstanding to bepermitted by the lender pursuant to the notice" (see id. at[3] b] [6]).

[*330] [HN10] These filing provisions promote thelegislative intent to assure "public notice of anytransaction of the owner, contractor or subcontractor thatmay lead to depletion of funds available for future trustclaims, even where the depletion merely repays advancesthat were in fact used to pay trust claims accruing at anearlier [d]ate" (1959 Report of NY Law Rev Commn, at216). Such record notice provides "persons who furnishmaterials and services in reliance on the trust assetsreceivable by the trustee at a later stage of theimprovement . . . notice that those assets have beenanticipated for current expense" (id.).

[HN11] Pursuant to section 73 of the Lien Law, theproper filing of a "Notice of Lending" is an affirmativedefense to an action charging a trustee with a diversion oftrust assets or an action to recover diverted assets from atransferee. In an action against a trustee, the notice oflending evidences that the alleged diversion "was madeas security for or in consideration of or in repayment ofadvances made to him as trustee or on his behalf astrustee . . . , and that such advances were actually appliedfor a purpose of the trust" (id. at § 73 [2]).

Application of the Statute

Under Lien Law article 3-A, the funds NYCHAowed Berry Street under the turnkey sale contract weretrust assets subject to the rights of trust beneficiaries andit is undisputed that plaintiffs, as subcontractors on theproject, are trust beneficiaries (see Lien Law §§70, 71).Berry Street assigned its rights under the NYCHAcontract to Fleet and, as a result, NYCHA's directpayment of the sale proceeds to Fleet rendered Fleet astatutory owner-trustee. [HN12] As a statutory trustee,Fleet was obligated to act "as fiduciary manager" of thefunds (1959 Report of NY Law Rev Commn, at 214).Fleet therefore owed the beneficiaries a duty of loyaltyand was required "to administer the trust solely in theinterest of the beneficiaries" (2A Fratcher, Scott onTrusts, at §170 [4th ed]; Restatement [Third] of Trusts §170 [1]).

In these circumstances, Fleet's application of the trustassets to repay its loans to Berry Street--withoutacknowledging its status as trustee and providing noticeto trust beneficiaries of the transfer--constituted a breachof its fiduciary duty. Fleet asserts that the inclusion of thereference to the assignment in its mortgages was the[**1041] [***739] equivalent of record notice topotential claimants of Fleet's priority interest in the trust

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assets. There is no question that by complying with thefiling and covenant [*331] requirements of Lien Law §§13 (2) and 22, Fleet's building loan mortgages obtainedpriority over subsequently filed mechanics' liens.

This argument overlooks the important fiduciaryconsiderations adopted by the Legislature to safeguardtrust beneficiaries. Potential trust beneficiaries mighthave been able to ascertain Fleet's claim of priority as asecured mortgage lender but nothing in the mortgagedocuments identified Fleet as a trustee of the article 3-Aassets. Indeed, Fleet's own posture during the early stagesof this litigation denied that the assignment rendered it atrustee. In essence, Fleet seeks to escape the effect of theassignment by arguing that plaintiffs should haveappreciated the implications that Fleet itself refuted. Evenif plaintiffs had surmised Fleet's role as the trustee byexamining the mortgage documents, those filings wouldnot have informed beneficiaries that Fleet planned to usetrust assets to repay itself.

We conclude that the filing by Fleet of a notice oflending--although not necessarily the only deviceavailable--would have satisfied Fleet's fiduciary duty toprovide notice to the trust beneficiaries of its use of trustassets to discharge Berry Street's debt. Such a filingwould fulfill the legislative purposes of article 3-A andeliminate any taint of self-dealing by a trustee who is alsoa trust beneficiary. Notably, had Fleet filed a notice oflending regarding its use of the trust assets to repay itself,the beneficiaries could have ascertained that (1) the trustassets were being depleted and (2) Fleet was a trusteeacting as both transferor and transferee of those funds(see 1959 Report of NY Law Rev Commn, at 216; Lien

Law § 73). Nothing in the filings relied upon by Fleetimparted this information to trust beneficiaries. 3 Hence,Fleet failed to file any document that served as adequatenotice to beneficiaries of its status as a trustee and itsdepletion of trust funds to repay its loans.

3 Moreover, there is no information in the recordindicating whether Fleet complied with thestatutory record-keeping obligations of trustees(see Lien Law § 75). Such compliance seemsunlikely considering Fleet's initial posture in thislitigation.

Although Fleet breached its fiduciary obligation, theissue of damages for such a breach is not before usbecause the parties stipulated to damages prior to thisappeal. Thus, we have no occasion to address theconclusion reached by the lower courts that Fleet'srepayment to itself invalidated its statutory priority[*332] as a secured mortgage lender and rendered Fleetliable to plaintiffs for the full amount of the transferredtrust funds.

Accordingly, the judgment appealed from and theorder of the Appellate Division brought up for reviewshould be affirmed, with costs.

Chief Judge Kaye and Judges G.B. Smith, Ciparick,Rosenblatt and Read concur; Judge R.S. Smith taking nopart.

Judgment appealed from and order of the AppellateDivision brought up for review affirmed, with costs.

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Exhibit PP: NYCLS Lien § 73

Exhibit QQ: Notice of Lending Form

Exhibit RR: Title Loan Policy Form

Faculty Biographies

Aloysius Stork, Senior Counsel and Vice President, has been with Lex Terrae since 1985 and has been in the title industry since 1982. Al has a solid reputation for reliability and for providing clients with the correct answers to their many complex questions. He currently serves on the legislative committee of the New York State Land Title Association and is a member of the New York City Bar Association. His expertise in a broad array of real estate, transfer tax and mortgage tax issues are at your ready disposal.

[email protected] direct telephone number: 212-716-3281 download vcard EDUCATION Brooklyn Law School, J.D. 2007 Yeshiva University, B.A. 2004, cum laude BAR ADMISSIONS 2008, New York 2008, District of Columbia 2007, New Jersey BIOGRAPHY Ariel Weinstock joined the real estate department in 2007. His practice focuses on real estate and construction matters.

Since joining the firm, Ariel has been involved in numerous real estate transactions including commercial leases, sales, acquisitions and financings. Ariel has also been involved in drafting and negotiating construction agreements, including AIA-based construction documents, for both national and local clients on significant construction projects.

Ariel was recently appointed as the Vice-Chair of the New York County Lawyers’ Association Construction Law Committee and currently serves as Secretary of the Construction Law Committee of the New York State Bar Association’s Real Property Law Section. COURT ADMISSION U.S. District Court of New Jersey BAR AFFILIATIONS AND PRESENTATIONS New York County Lawyers’ Association Vice-Chair, Construction Law Committee

New York State Bar Association Secretary, Construction Law Committee, Real Property Section

Lecturer, Default by Owners, Mechanic Lienors and Lenders in Construction Contracts – Remedies for Cure, NYSBA CLE, Hot Topics in Real Property Law and Practice (December, 2010)

Lecturer, Survey Examination, NYSBA CLE, Practical Skills – Purchases and Sales of Homes (November, 2010)

Lecturer, Opening Up: Office Leasing and Renovation Contracts, NYCLA CLE, First Annual Business and Contract Law Institute (September, 2010)

Lecturer, Survey Examination, NYSBA CLE, Practical Skills – Purchases and Sales of Homes (November, 2009)

mailto:[email protected]

http://www.katskykorins.com/vcards/Ariel%20Weinstock.vcf

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