State by Abrams v. Thwaites Place Associates

• Decision Date: 08 March 1990
• Citation: 552 N.Y.S.2d 226,155 A.D.2d 3
• Parties: STATE of New York by Robert ABRAMS, Attorney General of theState of New York, Petitioner-Appellant, v. THWAITES PLACE ASSOCIATES, a limited partnership, and Prenk Curanaj and Nikoll Curanaj, individually and as general partners of Thwaites Place Associates, Respondents-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 226

552 N.Y.S.2d 226

155 A.D.2d 3

STATE of New York by Robert ABRAMS, Attorney General of theState of New York Petitioner-Appellant, v. THWAITES PLACE ASSOCIATES, a limited partnership, and Prenk Curanaj and Nikoll Curanaj, individually and as general partners of Thwaites Place Associates, Respondents-Respondents.

Supreme Court, Appellate Division First Department.

March 8, 1990.

Susan Rowley, of counsel (John W. Corwin and Jane M. Azia, New York City, with her on the brief; Robert Abrams, Albany, Atty. Gen., attorney) for petitioner-appellant.

Paul F. McAloon, New York City, Blauman and McCabe, for respondents-respondents.

Before KUPFERMAN, J.P., and ASCH, KASSAL, WALLACH and RUBIN, JJ.

RUBIN, Justice.

Petitioner Attorney General of the State of New York commenced this special proceeding under the authority granted by General Obligations Law § 7-109. It seeks the return of rent security deposited pursuant to the General Obligations Law § 7-103 which respondents, the former landlords of the subject premises, failed to turn over to the receiver in a foreclosure proceeding as required by § 7-105 of the statute. Petitioner further alleges that defendants failed to pay to the tenants annual interest on the money deposited (General Obligations Law § 7-103[2-a]. Petitioner therefore seeks a judgment directing respondents to remit the security deposits to the receiver and to pay interest thereon to the tenants.

In a judgment filed March 5, 1984, the IAS Court dismissed the petition on the grounds that the owner and holder of the mortgage, the United States Department of Housing and Urban Development ("HUD"), was a necessary party to the proceeding, and as a matter of comity. Upon petitioner's motion to renew on the ground that HUD had no opposition to the proceeding, the matter was restored to the calendar by order dated February 19, 1987. On May 5, 1987, after conference, the IAS Court directed respondents to submit a full accounting. Upon respondents' failure to comply, petitioner brought a motion dated May 23, 1988 to calendar the proceeding for a determination on the merits. By order entered December 9, 1988, the IAS Court granted the motion to the extent of directing a reference to determine 1) the amount of security received from each tenant together with the interest due thereon, 2) the amount of outstanding rent owed by each tenant to respondent Thwaites Place Associates and 3) the net amount of security plus interest set off by any amount of rent found due for each tenant.

Petitioner appeals from this order on the grounds that 1) respondents are not entitled to apply the security deposits to rent alleged to be due and 2) that, in any event, respondents' entitlement to receive rent payments which became due while they retained ownership of the premises did not survive their loss of ownership interest in the premises upon foreclosure. Respondents, relying on the opinion of the Appellate Division, Second Department in Glass v. Janbach Properties, Inc., 73 A.D.2d 106, 425 N.Y.S.2d 343, argue that, irrespective of the provisions of Article 7 of the General Obligations Law, they have the right to apply any sum held as a security deposit to compensate them for damages sustained as the result of a breach of the lease. They contend that they properly applied amounts retained on deposit against outstanding rent owed by the tenants as of November 16, 1981. While the order appealed from does not expressly state as much, it is reasonably clear that the referee is directed to determine the amount of the security offset by any rent owed as of this date.

A receiver for the property was appointed by order of the United States District Court for the Southern District of New York dated November 20, 1981. The order, which was apparently issued ex parte, recites, inter alia, that "plaintiff is granted immediate possession of ... tenant's [sic] security deposits" and directs Thwaites Place Associates, its agents and employees to turn over the funds to the receiver. No appearance was made on behalf of the debtor, and a judgment of foreclosure was entered on default on December 22, 1981.

28 U.S.C.A. § 1345 invests the federal courts with original jurisdiction over "all civil actions, suits or proceedings commenced by the United States, or by an agency or officer thereof expressly authorized to sue by Act of Congress." This jurisdiction extends to actions in foreclosure (Benton v. Woolsey, 37 U.S. (12 Pet.) 25, 9 L.Ed. 987 [1838], District Court's jurisdiction sustained without question).

In its March 5, 1984 judgment dismissing the petition, the IAS Court noted, "it appears that the United States District Court has already directed the turnover of the funds to the United States Department of Housing and Urban Development in the cause of action in that court. To the extent that the petitioner seeks here relief which is inconsistent with that order (e.g., turnover to the tenants), that inconsistency should be resolved by making application in the first instance to the federal court, particularly since there appears to be a continuing action there; because that court has already issued an order on the same subject, as a matter of comity it is appropriate to avoid conflict and permit that court to resolve the issue, consonant with the scope of its jurisdiction." While petitioner was subsequently granted leave to bring his petition anew on the ground that HUD had no opposition to the proceeding, neither party took issue with the court's ruling that relief from the terms of the District Court's order must be sought in that forum.

In our view, this order is dispositive of the issues raised upon this appeal. It clearly states that relief from the District Court's order directing turnover of the security deposits be sought in federal court, and this directive is binding upon the parties as law of the case (see, Siegel, NY Prac § 448). The determination is based upon the sound principle of comity which is invoked to avoid unseemly conflicts between courts of concurrent jurisdiction (see, Pennsylvania v. Williams, 294 U.S. 176, 55 S.Ct. 380, 79 L.Ed. 841). Respondents do not attempt to attack the ruling of the federal court collaterally by challenging its jurisdiction in this proceeding and are relegated to the remedies available in federal court for relief from a prior judgment or order in accordance with the Federal Rules of Civil Procedure under Rule 59(e) or Rule 60(b) (United States v. Belanger, 598 F.Supp. 598, 601). As this court has recently had occasion to observe, a party should not be able to obtain by default a result which he would not have been able to achieve by good-faith participation in the litigation process (Boorman v. Deutsch, 152 A.D.2d 48, 547 N.Y.S.2d 18).

The IAS Court's observation that the relief sought by petitioner (judgment directing that the interest on the security deposits be turned over to the tenants) is inconsistent with the terms of the District Court's order (that the deposits be turned over to HUD) overlooks its substantive basis. The order of the District Court merely reflects State law on the disposition of security deposits upon appointment of a receiver (General Obligations Law § 7-105[1]. Moreover, the premises were ultimately sold by the receiver to the tenants, who took title in the form of a cooperative corporation. In accordance with General Obligations Law § 7-105(1), security deposits are required to be turned over to a purchaser. Although § 7-105(2) provides that security held by a receiver shall be held "subject to such disposition thereof as shall be provided in an order" entered in a foreclosure action, we note that the District Court entered no order with respect to disposition by the receiver and, in any event, federal foreclosure actions are governed by the substantive law of the state (Metropolitan Life Ins. Co. v. Kane, 117 F.2d 398 [7th Cir.1941]. Therefore, it is entirely...