Hammelburger v. Foursome Inn Corp.

• Decision Date: 23 December 1981
• Citation: 446 N.Y.S.2d 917,54 N.Y.2d 580
• Parties: , 431 N.E.2d 278 Ludwig HAMMELBURGER et al., Appellants, v. FOURSOME INN CORP., Respondent, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 917

446 N.Y.S.2d 917

54 N.Y.2d 580, 431 N.E.2d 278

Ludwig HAMMELBURGER et al., Appellants, v. FOURSOME INN CORP., Respondent, et al., Defendants.

Court of Appeals of New York.

Dec. 23, 1981.

Isaac Anolic, New York City, for appellants

Bernard P. McSherry and Christopher J. Allwarden, Huntington, for respondent.

Michael Permut and John J. Boyle, for The New York State Land Title Ass'n, amicus curiae.

OPINION OF THE COURT

MEYER, Judge.

A mortgagor, who has given an estoppel certificate stating that there are no defenses or offsets to the mortgage or to the bond which the mortgage secures, will be estopped from asserting the defense of criminal usury unless it be shown that (1) the mortgagor executed the estoppel certificate under duress or other basis for invalidation, or (2) the assignee took with knowledge of the criminally usurious nature of the transaction or of the fact that duress (or other invalidating circumstances) were exerted in obtaining execution of the estoppel certificate. The papers on the motion and cross motion in the foreclosure action which is the subject of this appeal having raised issues of fact concerning whether the transaction was criminally usurious, concerning what, if anything, the assignees were aware of with respect to the nature of the transaction and concerning duress, it was error for the Appellate Division, 76 A.D.2d 646, 437 N.Y.S.2d 356, in reversing Special Term's denial of the defendant mortgagor's motion to amend to allege criminal usury and grant of the assignees' cross motion for summary judgment, to grant to defendant summary judgment declaring the mortgage void as a matter of law and dismissing the complaint. The order of the Appellate Division should, therefore, be modified to delete so much thereof as grants judgment to defendant declaring the mortgage void and dismissing the complaint, and to remit the matter to Supreme Court, Suffolk County, for further proceedings, and, as so modified, should be affirmed, with costs.

I

In 1974, the Foursome Inn Corp., owner of the Surf and Sand Inn, in Montauk, New At Schwartz' examination before trial, conducted at Foursome's instance and a copy of which was annexed to Foursome's moving papers on the first motion hereafter referred to, he testified that he was a licensed real estate broker, that the mortgage lender was in fact Stallone Enterprises Corporation (SECO) though the mortgage was taken in Broadhollow's name because of marital problems of SECO's owner, that the $2,100 represented a 6% commission to Schwartz pursuant to a commission agreement with Foursome, and that Broadhollow serviced the mortgage for SECO before its assignment to plaintiffs and continued to do so for plaintiffs after that assignment.

                York, borrowed $35,000 from Broadhollow Funding Corporation secured by a mortgage on the inn premises.  The mortgage was for a three-year term at an interest rate of 24% per annum and contained a provision that the mortgage principal and interest "shall become due at the option of the mortgagee * * * after default * * * in furnishing a statement of the amount due on the mortgage and whether any offsets or defenses exist against the mortgage debt."   Only $32,900 was paid at closing to Foursome or for closing costs, however, the remaining $2,100 having been paid to Ira S. Schwartz, then secretary-treasurer of Broadhollow
                

The assignment to plaintiffs was made in October, 1975, 10 days after Beatrice Reilly, the president of Foursome, executed on its behalf an estoppel certificate stating that "there are no defenses or offsets to said mortgage, nor to the bond which it secures." Negotiations with Mrs. Reilly for the certificate were engaged in by both Ira Schwartz and his father, Abraham, then president of Broadhollow. Mrs. Reilly's affidavit, submitted in support of the third motion by defendant hereafter referred to, sets forth facts concerning both threats to foreclose and cajoling by the Schwartzes which suggest that she may have been misled concerning the nature of her default, the offer of a proposed extension of the mortgage, or both.

In July, 1976, Foursome defaulted on its payments. Plaintiffs then declared the entire principal balance due and instituted this foreclosure action. Foursome's answer was no more than a general denial but, subsequently, it moved for leave to amend the answer to assert the affirmative defense of criminal usury. As already noted, its moving papers on that motion included a copy of Ira Schwartz' deposition. Plaintiffs, relying on the estoppel certificate, cross-moved for summary judgment. Special Term denied the motion to amend and granted plaintiffs' cross motion for summary judgment, holding the defense not available to Foursome because waived by its execution of the estoppel certificate delivered to plaintiffs. On motion for reargument Special Term adhered to that ruling. A referee to compute was then appointed and after receipt of his report judgment of foreclosure and sale was entered. On the eve of sale, however, defendant having obtained additional counsel moved to vacate the judgment on papers, including the affidavit of Mrs. Reilly above referred to, which reiterated the criminal usury involved and set forth facts suggesting, as above noted, that she signed the estoppel certificate as a result of threats or of being misled, or both. That motion, too, was denied.

On appeal to the Appellate Division that court reversed, on the law, the orders denying the motions to amend the answer and to vacate the judgment, granted both motions, denied plaintiffs' motion for summary judgment and, acting pursuant to CPLR 3212 (subd. granted Foursome summary judgment declaring the mortgage void and dismissing the complaint. It reasoned that the societal interests protected by the public policy declared in the criminal usury statute could not be affected by estoppel based on conduct of the parties to the mortgage and, therefore, did not reach the question of duress. We conclude that (1) an estoppel certificate may waive criminal as well as civil usury; (2) duress, other invalidating circumstances, or knowledge on the part of the assignee before he takes the assignment of the criminal nature of the transaction or

of the exertion of duress may, however, invalidate or negate the estoppel certificate; and (3) there are in the instant case issues of fact which cannot be resolved on motion for summary judgment. We, therefore, modify as above indicated.

II

Though he be a bona fide holder, an assignee of a nonnegotiable bond and mortgage takes subject to any defense that would have prevailed against his assignor (Beck v. Sheldon, 259 N.Y. 208, 211, 181 N.E. 360, Kommel v. Herb-Gner Constr. Co., 256 N.Y. 333, 336, 176 N.E. 413). The rule is different, however, when the mortgagor gives the assignee an estoppel certificate (Riggs v. Purssell, 89 N.Y. 608, 610; see Real Property Law, § 254, subds. 2, 7) ¹ or with notice of his rights and of the facts "does what amounts to a recognition or adoption" of the transaction "although it was originally void or voidable" (Rothschild v. Title Guar. & Trust Co., 204 N.Y. 458, 464, 97 N.E. 879; Ann., 110 ALR 451, 452, 457). The assignee's right of recovery does not depend upon the title or interest of his assignor, but upon the mortgagor's representation by his certificate or by his conduct that the mortgage is valid and existing (Miller v. Zeimer, 111 N.Y. 441, 444, 18 N.E. 716; Weyh v. Boylan, 85 N.Y. 394, 397; Payne v. Burnham, 62 N.Y. 69, 72; see Union Dime Sav. Inst. of City of N. Y. v. Wilmot, 94 N.Y. 221; Ann., 165 ALR 626, 717).

The basis for the latter rule is, of course, the doctrine of estoppel in pais (Payne v. Burnham, supra, 62 N.Y. at p. 73; Ferguson v. Hamilton, 35 Barb. 427, 437). It turns not upon any view of the negotiability of the certificate (Weyh v. Boylan, supra, 85 N.Y. at p. 399) or the validity of the mortgage (Valentine v. Lunt, 115 N.Y. 496, 504, 21 N.E. 209), but upon the fact that the mortgagor would, if allowed to urge the defense, "obtain an unconscientious advantage at the expense of an innocent person" (Weyh v. Boylan, supra, 85 N.Y. at p. 398; see, also, Rothschild v. Title Guar. & Trust Co., 204 N.Y. 458, 464, 97 N.E. 879, supra; Restatement, Contracts 2d, § 90, Comment a ), and the long-established principle that "where one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss, must sustain it" (National Safe Deposit Co. v. Hibbs, 229 U.S. 391, 394, 33 S.Ct. 818, 819, 57 L.Ed. 1241, quoted with approval in Bunge Corp. v. Manufacturers Hanover Trust Co., 31 N.Y.2d 223, 228, 335 N.Y.S.2d 412, 286 N.E.2d 903). Estoppel does not render the mortgage valid but prevents "one who has represented it to be valid from asserting that it is void, to the injury of those who have acted in reliance upon the representation" (Claflin v. Boorum, 122 N.Y. 385, 389, 25 N.E.360; Valentine v. Lunt, supra). The policy of the usury statute is not, however, ignored, for the innocent assignee is permitted to recover only the amount advanced with interest, rather than to enforce the mortgage for its face amount (Miller v. Zeimer, supra, 111 N.Y. at p. 446, 18 N.E. 716; Payne v. Burnham, supra, 62 N.Y. at p. 74; Bennis v. Thomas, 14 A.D.2d 895, 221 N.Y.S.2d 350; Klein v. Meisels, 254 App.Div. 603, 2 N.Y.S.2d 820; see Osborne, Mortgages, § 111, p. 273; Ann., 165 ALR 626, 717).

The conduct or certificate must, however, have influenced the assignee to accept the mortgage to his injury (Payne v. Burnham, supra, 62 N.Y. at p. 73). That means not just reliance upon the existence of the certificate, but on the facts expressed The rules thus developed concern, it is true, so-called civil usury, as the Appellate Division noted, but were developed in relation to a statute (3 Revised Statutes part 2, ch. 4, tit. 3, § 5, now part of General Obligations Law, § 5-511, subd. 1), which...