Hammelburger v. Foursome Inn Corp.

• Decision Date: 25 August 1980
• Citation: 437 N.Y.S.2d 356,76 A.D.2d 646
• Parties: Ludwig HAMMELBURGER et al., Respondents, v. The FOURSOME INN CORP., Appellant; et al., Defendants.
• Court: New York Supreme Court — Appellate Division

Page 356

437 N.Y.S.2d 356

76 A.D.2d 646

Ludwig HAMMELBURGER et al., Respondents, v. The FOURSOME INN CORP., Appellant; et al., Defendants.

Supreme Court, Appellate Division, Second Department.

Aug. 25, 1980.

Vincent A. G. O'Connor, New York City, for appellants.

Harold Sussman, Garden City, for respondents.

Before HOPKINS, J. P., and LAZER, GIBBONS, GULOTTA and WEINSTEIN, JJ.

WEINSTEIN, Justice.

On August 30, 1974 the Foursome Inn Corporation, as mortgagor, executed a mortgage with Broadhollow Funding Corp. (BFC) in the principal sum of $35,000. The mortgage was for a three-year term, and carried a per annum interest rate of 24%. Foursome received only $32,900 of the principal sum; the remaining $2,100 was retained as a "commission" by an officer of BFC.

On October 1, 1975, Beatrice Reilly, Foursome's president, executed an estoppel certificate relative to the mortgage, stating that "there are no defenses or offsets to said mortgage, nor to the bond which it secures." There were allegations that Reilly consented to executing the estoppel certificate only due to explicit threats of foreclosure from officers of BFC. In any event, 10 days later BFC assigned the mortgage to the Hammelburgers, plaintiffs herein, and the assignment was duly recorded in the Suffolk County Clerk's office.

Foursome defaulted on its payment of July 30, 1976. Pursuant to the mortgage agreement, the Hammelburgers exercised their right to accelerate the principal sum and interest owed under the mortgage and thereafter instituted the within foreclosure action. Foursome's original answer was essentially a general denial, but subsequent to deposing the officer of BFC with whom the mortgage had been drawn, Foursome moved for leave to amend its answer to assert the affirmative defense of criminal usury (see Penal Law, § 190.40). The Hammelburgers cross-moved for summary judgment, based on the estoppel certificate. The court denied Foursome's motion and granted the cross motion for summary judgment of foreclosure. A subsequent motion to vacate the judgment, based on allegations of duress in the procurement of the estoppel certificate, was denied in court on November 1, 1979 and the foreclosed property was sold the next day. The closing on the sale was stayed pending this appeal. For the reasons set forth below, and pursuant to our authority under CPLR 3212 (subd. (b)), we vacate the judgment and declare the mortgage null and void.

The first question to which this court addresses itself is whether the mortgage was usurious as a matter of law. We conclude that it was. The Court of Appeals, in Band Realty Co. v. North Brewster Inc., 37 N.Y.2d 460, 373 N.Y.S.2d 97, 335 N.E.2d 316, reaffirmed the traditional method for calculating the true interest rate of a loan from the principal of which a discount has been retained by the lender. The discount, divided by the number of years in the term of the mortgage, should be added to the amount of interest due in one year, and this sum is compared to the difference between the principal and the discount in order to determine the true interest rate (see, also, Feldman v. Kings Highway Sav. Bank, 278 App.Div. 589, 102 N.Y.S.2d 306, affd. 303 N.Y. 675, 102 N.E.2d 835). Applying this rule to the case at bar, which involves a three-year mortgage, we add one-third of the discount ($700) to the interest over the first year (24% of $35,000, or $8,400), arriving at a sum of $9,100. Comparing this to the difference between the principal and the discount retained by BFC (i. e., $32,900), we find that the true interest rate was 27.7% per annum, clearly in excess of the legally permissible maximum of 25% as set forth in section 190.40 of the Penal Law. Accordingly, we hold that the mortgage herein was, as a matter of law, criminally usurious.

Having reached the initial determination that the mortgage which is the subject of this action was executed on terms prohibited by the Penal Law of this State, we now are confronted with the central issue of this appeal: whether the estoppel certificate executed by Foursome operates to prevent it from raising the defense of illegality in this action. ¹ We approach this issue initially without regard to the allegations that the certificate was the product of duress.

It has long been held that when a mortgagor executes and delivers a declaration that no claims or defenses lie against the mortgage, the mortgagor is estopped from interposing any defense, including one of usury, against the mortgage (see Union Dime Sav. Inst. of City of N. Y. v. Wilmot, 94 N.Y. 221; Bennis v. Thomas, 14 A.D.2d 895, 221 N.Y.S.2d 350; Sperling v. Babian, 227 App.Div. 53, 236 N.Y.S. 643; J & A Corp. v. Cass, 238 App.Div. 864, 262 N.Y.S. 1002). However, Union Dime and its progeny have all involved cases of civil usury. Our attention has not been called to, nor has our research revealed, any case in this State which has addressed the issue of whether a mortgagor may be estopped from raising the defense of criminal usury in a situation such as the one before the court.

There is a fundamental dichotomy between rights which are personal in nature, benefiting each member of society individually and discreetly, and those which exist for the protection of society in general. It is well settled that a party may waive a rule of law, a statute, or even a constitutional provision enacted for his benefit or protection, where it is exclusively a matter of private right which is involved and no considerations of public policy come into play (see Sentenis v. Ladew, 140 N.Y. 463, 35 N.E. 650). Indeed, it is pursuant to precisely this reasoning that parties have been deemed to waive the defense of civil usury when executing estoppel certificates (see Union Dime Sav. Inst. of City of N. Y. v. Wilmot, supra; Reyes v. Carver Fed. Sav. & Loan Assn., 74 Misc.2d 323, 344 N.Y.S.2d 501). But when a right has been created for the betterment or protection of society as a whole, an individual is incapable of waiving that right; it is not his to waive (see Parthey v. Beyer, 228 App.Div. 308, 238 N.Y.S. 412; ...