Nanuet Nat. Bank v. Eckerson Terrace, Inc.

• Court: New York Court of Appeals Court of Appeals
• Writing for the Court: FUCHSBERG; COOKE, C. J., and JASEN, GABRIELLI, JONES and WACHTLER, JJ., concur with FUCHSBERG
• Citation: Nanuet Nat. Bank v. Eckerson Terrace, Inc., 417 N.Y.S.2d 901, 47 N.Y.2d 243, 391 N.E.2d 983 (N.Y. 1979)
• Decision Date: 07 June 1979
• Parties: , 391 N.E.2d 983 NANUET NATIONAL BANK, Appellant, v. ECKERSON TERRACE, INC., et al., Defendants, and Token Carpentry, Inc., et al., Respondents.

Page 901

417 N.Y.S.2d 901

47 N.Y.2d 243, 391 N.E.2d 983

NANUET NATIONAL BANK, Appellant, v. ECKERSON TERRACE, INC., et al., Defendants, and Token Carpentry, Inc., et al., Respondents.

Court of Appeals of New York.

June 7, 1979.

Samuel Kirschenbaum, Roslyn, for appellant.

Donald Tirschwell, New City, for respondents.

OPINION OF THE COURT

FUCHSBERG, Judge.

Resolving a dichotomy among departments of the Appellate Division on a matter of no small consequence to the construction and banking industries, we hold that under section 22 of the Lien Law a lender that knowingly files a building loan contract that materially misrepresents the net sum available to the borrower for the improvement suffers a subordination of its mortgage to subsequently arising mechanics' liens.

Appellant Nanuet National Bank is the holder of a building loan mortgage on three parcels of real estate developed for residential use by Eckerson Terrace, Inc., which requested an advance of $36,000 on each plot for a total of $108,000. Having agreed to make the loan, the bank saw to it that Eckerson followed the procedure dictated by section 22 for perfecting a lien on the property in favor of the lender. Complying with those requirements, the borrower executed, and the bank thereafter duly filed, a statement of the consideration for the loan and of the "net sum available to the said borrower for the improvement". ¹ The statement indicated that the consideration and the sum available were each $108,000. It also represented that all expenses connected with the loan were to be "paid by borrower".

It was in the face of record notice of the bank's lien that respondents Token Carpentry, Inc., and Leon's Plumbing & Heating, Inc., performed work and supplied materials for which they qualified as mechanics' lienors on the property. The Token and Leon liens were duly filed. Perforce, subject to the challenge mounted by the contractors in this case, their liens, at least Pro forma, were junior to that of the bank.

The parties' rights started on their collision course when the borrower defaulted in its obligations to the bank. There ensued this foreclosure action, in which the borrower as well as the mechanics' lienors were named as defendants. The borrower did not contest the suit, but the contractors contended, in essence, that misstatements in the bank's filing rendered its interest subordinate rather than 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 gross amount, 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's position, stripped of unnecessary trimmings, is that the misstatements, if any there be, were not made by it, but by the borrower on its own behalf and that section 22 does not require that a lender guarantee the accuracy of statements for the filing of which it was only a conduit.

These contentions having been tested on cross motions for summary judgment, Special Term, citing HNC Realty Co. v. Golan Hgts. Developers, 79 Misc.2d 696, 360 N.Y.S.2d 954, held that the mortgage of a lender knowingly filing a materially false building loan statement is subordinated to subsequent mechanics' liens. It then proceeded to deny the motions on the ground that whether the statement was materially false and whether the bank had knowledge thereof were disputed questions of fact. The Appellate Division, Second Department, in unanimously affirming, expressly rejected the contrary holding of the Third Department in Ulster Sav. Bank v. Total Communities, 55 A.D.2d 278, 390 N.Y.S.2d 252. For the reasons which follow we uphold the determination before us now.

At the outset, we acknowledge that section 22 provides no explicit answer to the dilemma which confronted the courts below. True, the statute tells us that information as to the consideration for the loan, the related expenses, and the net amount available to the borrower must be filed and that "(i)f not so filed the interest of each party to such contract in the real property affected thereby, is subject to (subsequent mechanics') lien(s)". But it does not specify whether these consequences are to be visited on a lender that does file when it turns out that the information filed is inaccurate. In the face of legislative silence, we therefore must determine whether the words "so filed" refer not merely to the mechanics of the filing but also to the integrity of what is filed (see Becker v. Huss Co., 43 N.Y.2d 527, 541, 402 N.Y.S.2d 980, 984, 373 N.E.2d 1205, 1209).

The intent of the legislators, if ascertainable, is a particularly important guide to our construction. Turning for that purpose to the legislative history of section 22, we first note that the language at issue had its genesis in the economic malaise that prevailed at the end of the 1920's and into the early 1930's. The unusually heavy losses which "materialmen, supplymen and laborers" then suffered motivated the Legislature to take action which was thought likely to eradicate its root causes (see Report of the Joint Legislative Committee Investigating 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 N.Y. 336, 341-342, 133 N.E. 909, 911 (discussing preamendment purpose of statute)). Section 22 was amended to readily enable a contractor to learn exactly what sum the loan in fact made available to the owner of the real estate for the project (see Hearings of the Joint Legislative Committee, p. 1209 (1930)). And subdivision (3) of section 13 of the Lien Law was amended to strengthen the statutory provisions under which such funds were deemed to be held in trust. ³

Consistent with this overriding legislative objective, we believe the more reasonable interpretation of the statute is that which subjects the bank's interest to the subordination penalty if it knowingly files a materially false statement. Obviously, since a false filing is a snare for the unwary contractor no matter who is responsible for the misleading information, a balanced analysis must focus on optimizing the likelihood that...