Howard Sav. Bank v. Lefcon Partnership

• Decision Date: 14 November 1994
• Citation: 618 N.Y.S.2d 910,209 A.D.2d 473
• Parties: HOWARD SAVINGS BANK, Plaintiff-Respondent, v. LEFCON PARTNERSHIP, Defendant Third-Party Plaintiff, et al., Defendants, Mitsubishi Trust and Banking Corporation, additional Defendant on the counterclaim Respondent, E.W. Howell Co., Inc., Third-Party Defendant-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 910

618 N.Y.S.2d 910

209 A.D.2d 473

HOWARD SAVINGS BANK, Plaintiff-Respondent, v. LEFCON PARTNERSHIP, Defendant Third-Party Plaintiff, et al.,

Defendants,

Mitsubishi Trust and Banking Corporation, additional

Defendant on the counterclaim Respondent,

E.W. Howell Co., Inc., Third-Party Defendant-Appellant.

Supreme Court, Appellate Division,

Second Department.

Nov. 14, 1994.

Fischbein-Badillo-Wagner, New York City (Alan M. Gelb, Pamela A. Phillips, and Barbara Hair, of counsel), and Goldberg, Kohn, Bell, Black Rosenbloom & Moritz, Ltd., Chicago, IL (Terry F. Moritz and Frederic R. Klein, of counsel), for third-party defendant-appellant.

Schulte Roth & Zabel, New York City (Mark E. Kaplan, of counsel), for plaintiff-respondent and additional defendant on counterclaim respondent.

Before THOMPSON, J.P., and SULLIVAN, RITTER and FRIEDMANN, JJ.

MEMORANDUM BY THE COURT.

In an action to foreclose a 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 plaintiff Howard Savings Bank and Mitsubishi Trust and Banking Corporation for partial summary judgment dismissing the appellant's first counterclaim and the appellant's first cross claim, (b) denied the appellant's cross motion for summary judgment against Howard Savings Bank and Mitsubishi Trust and Banking Corporation, and (c) declared that the appellant's lien on the subject real estate was subordinate to the mortgage lien by Howard Savings Bank and Mitsubishi Trust and Banking Corporation, and (2) as limited by its brief, from so much of an order of the same court, entered June 28, 1991, as, upon renewal and reargument, adhered to the original determination.

ORDERED that the appeal from the order entered April 18, 1991, is dismissed, as that order was superseded by the order entered June 28, 1991, made upon renewal and reargument; and it is further,

ORDERED that the order entered June 28, 1991, is affirmed insofar as appealed from; and it is further,

ORDERED that the respondents are awarded one bill of costs.

The appellant E.W. Howell Construction Corp. (hereinafter Howell) served as the general contractor on a project known as the Wyndam East and Wyndam West, a 316-unit condominium complex located in Garden City. The developer, the Lefcon Partnership (hereinafter Lefcon), had obtained a building construction loan which allocated some $67,500,000 to the so-called "hard construction" costs of the project. Pursuant to Lien Law § 22, the lender, the Howard Savings Bank (hereinafter the Bank) and Lefcon filed with the County Clerk a building loan agreement, the mortgage, and various other documents detailing the amount of the loan and the various terms of the agreement, including terms relating to the Bank's obligation to fund the project, the conditions of that obligation, and the rights and remedies available to both Lefcon and the Bank in connection with the 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 and Banking Corporation (hereinafter Mitsubishi), declared Lefcon to be in default in connection with the building loan agreement, and subsequently commenced the instant foreclosure action. Howell was named a third-party defendant in the foreclosure action by Lefcon and later interposed an answer containing a "first counterclaim and cross claim" against the Bank and Mitsubishi, which sought, inter alia, to foreclose on a mechanic's lien in an amount in excess of $8,200,000, the sum representing labor and materials which Howell had supplied to the project 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 and incomplete building loan agreement, and thereafter, by failing to provide written notice of alleged modifications to that agreement. As a consequence, Howell alleged that its lien should be accorded priority over the Bank's first mortgage.

The Supreme Court rejected Howell's arguments, and granted partial summary judgment to the Bank declaring that Howell's mechanic's lien was subordinate to the Bank's first mortgage. Upon Howell's motion for reargument and renewal, the court adhered to its original determination. We affirm.

Lien Law § 22 provides, in pertinent part, that a building loan agreement, as well as any modification thereof, must be in writing and must show the consideration paid for the loan, all related expenses incurred or to be incurred in connection with the loan, "and the net sum available to the borrower for the improvement." Amendments to the agreement "must be filed within ten days after the execution of any such modification." Noncompliance with the disclosure mandate of Lien Law § 22 results in the subordination of the Bank's mortgage to the liens subsequently filed by those who provided services and materials in connection with the project (see, Nanuet Nat. Bank v. Eckerson Terrace, 47 N.Y.2d 243, 417 N.Y.S.2d 901, 391 N.E.2d 983).

The underlying purpose of Lien Law § 22 is to permit contractors and subcontractors to ascertain how much money will be made available to the owner in connection with the project and thus, the ability of the owner to pay for any services and materials provided (see, Nanuet Nat. Bank v. Eckerson Terrace, supra, at 243, 417 N.Y.S.2d 901, 391 N.E.2d 983; HNC Realty Co. v. Bay View Towers Apts., 64 A.D.2d 417, 409 N.Y.S.2d 774). This court has held that a Lien Law notice is required only with respect to "material" modifications of the agreement (see, HNC Realty Co. v. Bay View Towers Apts., supra, at 426, 409 N.Y.S.2d 774). A modification of a building loan agreement is " 'material' if it: (1) alters the rights and liabilities otherwise existing between the parties to the agreement or (2) enlarges, restricts or impairs the rights of any third party beneficiary" (HNC Realty Co. v. Bay View Towers Apts., supra, at 426, 409 N.Y.S.2d 774).

On appeal, Howell argues, inter alia, that the instant building loan agreement obligated the Bank to ensure that the loan proceeds would "always" be sufficient to complete the project, and that since the Bank allegedly knew from the inception that the project was underfunded by some $10,000,000, the loan agreement was misleading and false when filed. Howell further asserts that, although the Bank was aware that the undisbursed loan proceeds were purportedly insufficient to complete the project, and that Lefcon was unwilling or unable to fund the shortfall, the Bank should have, but did not, file modifications to the original loan agreement giving notice of these occurrences. Howell also contends that the Bank modified the agreement without filing a Lien Law notice when it did not hold Lefcon in default on several occasions during the course of the project even though the agreement would have permitted it to do so. According to Howell, the Bank's failure to file modifications to the agreement in light of these developments deprived it of the knowledge that there were insufficient funds to complete the job and thus the ability to make a judgment as to whether to continue working on the project.

Contrary to Howell's suggestions, the disclosure contemplated by the Lien Law is not intended to function as a guarantee that a construction project is adequately financed or economically viable....