First Nationwide Bank v. Brookhaven Realty Associates

• Decision Date: 22 January 1996
• Citation: 637 N.Y.S.2d 418,223 A.D.2d 618
• Parties: FIRST NATIONWIDE BANK, etc., Respondent, v. BROOKHAVEN REALTY ASSOCIATES, et al., Appellants, et al., Defendant.
• Court: New York Supreme Court — Appellate Division

Page 418

637 N.Y.S.2d 418

223 A.D.2d 618

FIRST NATIONWIDE BANK, etc., Respondent, v. BROOKHAVEN REALTY ASSOCIATES, et al., Appellants, et al., Defendant.

Supreme Court, Appellate Division Second Department.

Jan. 22, 1996.

Certilman, Balin, Adler & Hyman, L.L.P., East Meadow (Bruce J. Bergman, Michael D. Brofman, Thomas J. McNamara, and Lawrence S. Novak, of counsel), for appellants.

Schulte, Roth & Zabel, New York City (Robert M. Abrahams, John P. Stigi III, and Bridget E. Calhoun, of counsel), for respondent.

Before BALLETTA, J.P., and THOMPSON, JOY and GOLDSTEIN, JJ.

MEMORANDUM BY THE COURT.

In an action, inter alia, to foreclose a mortgage on real property, the defendants Brookhaven Realty Associates, Allen I. Gross, Edith Gross, and Solomon Werdiger appeal, (1) as limited by their brief, from stated portions of an order of the Supreme Court, Queens County (Kitzes, J.), dated June 27, 1994, which, among other things, granted the plaintiff's motion for summary judgment to foreclose the mortgage and for a deficiency judgment, and (2) from an order of the same court, dated September 1, 1994, which denied their motion for renewal and reargument. The defendant Edith Gross separately appeals from an order of the same court, dated January 18, 1994, which denied her motion for renewal and reargument of a decision of the same court, dated September 29, 1993, which, inter alia, determined the plaintiff's motion for summary judgment.

ORDERED that the appeals from so much of the orders dated January 18, 1994, and September 1, 1994, as denied the branches of the appellants' motions which were for reargument are dismissed, as no appeal lies from an order denying reargument; and it is further,

ORDERED that the appeal from so much of the order dated January 18, 1994, as denied the branch of Edith Gross's motion which was for renewal of the decision dated September 29, 1993, is dismissed, as no appeal lies from an order denying renewal of a decision (see, DeFalco v. JRS Confectionary, 118 A.D.2d 752, 500 N.Y.S.2d 143); and it is further,

ORDERED that the order dated June 27, 1994, is affirmed insofar as appealed from; and it is further,

ORDERED that the order dated September 1, 1994, is reversed insofar as reviewed, the appellants' motion to renew is granted, and, upon renewal, the motion is denied; and it is further,

ORDERED that the respondent is awarded one bill of costs.

Under the terms of the mortgage nonrecourse agreement between the plaintiff, First Nationwide Bank (hereinafter the Bank), and the defendant Brookhaven Realty Associates, a general partnership (hereinafter Brookhaven), it was agreed that Brookhaven and its individual partners would not be personally liable in the event of a default except under certain conditions. One such condition occurred if a bankruptcy proceeding was commenced by or against Brookhaven and that proceeding was not dismissed or otherwise resolved within 90 days of its filing so as to permit the Bank to exercise its security interest in the property. Brookhaven defaulted on the mortgage. The Bank thereafter commenced an action in Federal court against Brookhaven and a number of other parties to whom the Bank had extended loans alleging, inter alia, that Brookhaven had committed fraud in obtaining its loan from the Bank. The Bank then commenced this foreclosure action against Brookhaven and Brookhaven filed a voluntary petition in bankruptcy. The bankruptcy proceeding was not dismissed until well after the 90-day period set forth in the nonrecourse agreement had expired. Following the dismissal of the bankruptcy proceeding the Bank sought a determination in the foreclosure action that it was entitled to a deficiency judgment against Brookhaven and its partners in view of Brookhaven's triggering of the bankruptcy default clause. The Bank's motion for summary judgment to foreclose the mortgage was granted, and the court found that Brookhaven, Allen I. Gross, Edith Gross, and Solomon Werdiger, as partners in Brookhaven, could be personally liable for any deficiency. The cross motion of the defendant Edith Gross for summary judgment on her claim that she was not a partner in Brookhaven was denied and summary judgment was awarded to the Bank on that issue.

The appellants claim that the Supreme Court erred in permitting the Bank to exercise its rights to seek a deficiency judgment because the bankruptcy default clause contained in the nonrecourse agreement is in violation of section 365(e) of the 1978 Bankruptcy Code (see, 11 U.S.C. § 365[e] ). This claim is without merit.

Once the bankruptcy proceeding terminated the enforceability of that clause was to be determined by State law and the contract between the parties (see, Riggs Natl. Bank v. Perry, 729 F.2d 982, 987; In re Wilson, 97 Bankr. 285, 287). Even assuming, as the Supreme Court did, that the Bankruptcy Code applied, the court properly found that section 365(e) did not apply herein because a mortgage is not an "executory" contract as defined under the Bankruptcy Code (see, In re Pacific Express, 780 F.2d 1482, 1487; In re Boutiette, 168 Bankr. 474, 480; Matter of North Am. Dealer Group, 16 Bankr. 996, 1000; In re ESS Lambert Assocs., 62 B.R. 328, 336).

Although several bankruptcy courts have applied 1978 Bankruptcy Code (11 USC) § 365(e) to nonexecutory contracts, we are not bound by those decisions. Moreover, the policies of providing a debtor with a fresh start and an opportunity to reorganize its finances (see, Riggs Natl. Bank v. Perry, supra, at 985) are not present in a foreclosure proceeding. Nor does the Bankruptcy Code's broad purpose of protecting the debtor's estate to permit the equitable distribution of its assets to the creditors (see, Matter of William B. Kessler, Inc., 23 Bankr. 722, affd. 55 Bankr. 735) apply here. Brookhaven's bankruptcy petition demonstrates that the Bank was its only major creditor.

We are also not persuaded that the Bank waived its right to seek recourse against Brookhaven and its partners by entering into a Cash Collateral Stipulation (hereinafter the Stipulation) with Brookhaven while the bankruptcy proceeding was pending. That Stipulation did not dismiss or otherwise resolve the bankruptcy proceeding within 90 days of its filing, as required by the nonrecourse agreement. Nor did the Stipulation permit the Bank to "enforce its security interest" as the exercise of that interest implies "some right on the part of the creditor to exercise dominion over the pledged property" (Bassett v....