New York Business Litigation Lawyer Blog

April 8, 2013

Dismissal of Foreclosure Action Does Not Stay Statute of Limitations Period to Foreclose

In almost any setting, when a borrower fails to pay a mortgage, the lender will issue a letter accelerating the entire amount owed notwithstanding that the terms of the mortgage only require monthly payments. That letter informs the borrower of the default and demands full payment of the amount outstanding. That letter is typically a prerequisite for the lender’s filing of a foreclosure action but on the flip side, the lender’s six year statute of limitations period begins from the date of that letter.

On August 20, 1992, Dime Savings Bank issued an acceleration letter to the borrowers. In September 1992, Dime commenced a foreclosure action. That action was dismissed but not on the merits of the case. The lender commenced a second lawsuit in April 1999. The court granted the borrowers’ motion to dismiss as more than six years had passed from the date of the 1992 acceleration letter. The lender appealed claiming that the dismissal of the first case suspended the running of the statute limitations period.

The Second Department affirmed that dismissal finding that to stop the statute of limitations the lender must affirmatively revoke the acceleration. Because the earlier dismissal was not an affirmative act of revocation, the lender could not now seek payment of that loan.

February 25, 2013

Bank Not Entitled to Recover Expenditures for Marketing a Foreclosed Property

by The Silber Law Firm LLC

After defendant defaulted on a $1.3 million mortgage and note, the bank foreclosed. Despite the appointment of a receiver, during the pendency of the foreclosure action, the bank incurred a host of expenses. One of those was $40,000 for marketing commissions to a real estate marketing company. After the auction, a surplus in excess of $250,000 remained. In reviewing the expenses submitted by the bank, the court initially rejected them all finding that the receiver should have addressed them, but later allowed the bank to recover taxes and insurance (without interest).

On appeal, the court agreed that the loan documents allowed the bank to pay the assorted expenses in maintaining the property throughout the foreclosure and to recover those costs when the property was sold. It disagreed, however, that the marketing costs were recoverable, notwithstanding that such marketing may have resulted in higher auction bids. As far as costs for appraisals and environmental assessments, the appellate court agreed with the trial judge in finding that once a receiver is in place, the receiver acts to maintain the property, including paying its expenses. Once the bank successfully installed the receiver, it no longer had any authority to pay for any expenses. Furthermore held the court, the receiver would in any event not have been permitted to pay these expenses as they were incurred not to maintain the property, but like the marketing costs, incurred to maximize the bids. This held true even if the bids were maximized, something that would benefit both the bank and the borrower.

It is important to remember that when banks foreclose, especially when the property is “above water” with equity, the property owner is entitled to recover that excess. Often, however, and unlike this case, if the owner does not object, the bank’s demands are agreed to by the court. Vigilance is crucial at this point especially if there has been no meaningful opposition to the foreclosure action. Please contact us if this issue is relevant and you have any questions.

February 20, 2013

The Bridesmaids Had No Dresses-but Were the Damages Sought Speculative?

by The Silber Law Firm LLC

Defendant failed to complete eight bridesmaids dresses until two hours after the ceremony was scheduled to begin, when they were delivered by the groom. As a result of this delay, plaintiff incurred a host of delays for which she incurred expenses, including a delay in the bride’s appearance from the rented limousine, so as not to break the tradition of not being seen by the groom or guests before the ceremony. For these expenses, the court awarded plaintiff damages. However, for the wedding parties’ inability to have pictures taken in the scenes scheduled and for the bridesmaids wearing different clothing in different pictures, no award would be made as no amount could be reasonably fixed as damages for these items. The court also rejected damages for emotional distress, finding that plaintiff “failed to meet the high threshold required in proving” this claim because defendant’s failure to deliver the dresses was “not so outrageous in character and extreme in degree that it exceeds all bounds tolerated by a decent society which is of a nature calculated to cause, and does cause, serious mental distress.”

December 26, 2012

Property Inspection Part II-from a Haunted House to the Bat Cave

by The Silber Law Firm LLC

After writing about the “haunted house” case recently, I came across another case that addressed the same concepts, and also in an unusual setting. The haunted house court had decided that because the buyer could not have anticipated that the house under contract was haunted, and was therefore not expected to inspect the property for ghosts, and because the sellers had knowledge of the haunting, the buyer could cancel the purchase contract.

This case, Jablonski v Rapalje, involves sellers that may have hid from a buyer the fact that the house in question was bat infested. While some of the facts should have lead the buyer to pay more attention and realize that something was amiss (discussed below), the particulars of what the buyer should have questioned and investigated divided the court. The majority decided that the sellers may have concealed the bats from the buyer, so that the buyer was allowed to cancel the sales contract.

A fair reading of these cases highlight courts trying to find a way to grant recision. To do so, the courts had to first find the sellers’ concealment. This case focused on whether the sellers actively concealed the bat infestation, while the haunted house court focused on whether the buyer had an obligation to search for ghosts once the seller publicized the haunting but did not inform the buyer. Each court then turned to a detailed explanation of why the buyers were not obligated to inspect for that concealed issue, so that the contracts could be rescinded.

December 17, 2012

An Unqualified Offer to Pay a Reward Cannot Be Later Qualified or Negotiated

by The Silber Law Firm LLC

A musician’s laptop, loaded with valuable proprietary information, was stolen while he was on tour in Germany. A reward was offered, initially set at $20,000, but later raised to $1 million. The plaintiff found the laptop and returned it, but the reward was not paid because the hard drive had allegedly been returned with corrupted information. The musician had the hard drive examined and wiped when the data could not be recovered.

The musician argued that he intended the reward to be for the return of his data and information, not just the physical laptop. He also argued that the reward was akin to an advertisement, but not a firm offer to pay anything.

The court in Augstein v. Leslie addressed the second argument first, and rejected it. A reward, wrote the court, was intended to “induce performance” by the “‘offeree [for] a specific action.'” The news reports of the theft and subsequent reward “would lead a reasonable person to believe that [the musician] was making an offer.” Notwithstanding the size and significance of the amount, the reward was a promise to pay if a service was provided. Because that was the case here, the plaintiff could collect the reward.

December 11, 2012

Sophisticated Party Again Fails to Do its Own Investigation

by The Silber Law Firm LLC

The last time we wrote on this topic, a group of plaintiffs’ had their $900 million claim thrown out by a judge, essentially because the plaintiffs had stuck their head in the sand and did not investigate red flags evident in a transaction. In Pappas v. Tzolis, it was a paltry claim of just a few million that was tossed, but the underlying facts and legal principals were the same. Interestingly, it was again the selling party, the one which many believe to have less risk than the buyer, that came up holding the very short end of the stick.

The facts here are as follows: Pappas and Tzolis (and one other) formed a LLC to lease property. Tzolis personally provided the lease deposit of almost $1.2 million and was permitted to sublet the property. The parties also agreed that they had other business and could compete with the LLC or other members without notice. Trouble surfaced when Tzolis subleased the property to a company he controlled for $20,000 above the LLC’s monthly payment. Unhappy with that, Pappas claimed that Tzolis prevented the LLC from leasing it directly for a higher rent, and that Tzolis was generally frustrating the lease interest of the LLC. Shortly thereafter, Tzolis bought out the other members, including Pappas. At the closing, Pappas signed a document attesting to the facts that prior to his sale of his membership interest, he had done his own due diligence using his own lawyers, and was not relying on any representation made by Tzolis or upon their relationship as co-members of the LLC. After the transaction closed, Tzolis assigned the lease interest from his entity to a third-party for $17.5 million.

Pappas sued Tzolis claiming that Tzolis had lined up this sublease before the membership interest were transferred, in violation of his fiduciary obligations to him as a member of the LLC. Had he known, argued Pappas, he would not have agreed to sell for the price that he did. The lower court threw out the case, but parts of it, including the fiduciary claim, were reinstated by the Appellate Division. The Court of Appeals, reversed the Appellate Division and threw out the case.

November 13, 2012

Is There a “Haunted House” Exception in Real Estate Contracts?

by The Silber Law Firm LLC

I found this case while researching a potential litigation. While it is not a new decision, it presents a rather unusual set of facts.

A property buyer is charged with acting diligently in inspecting a property that is being considered for purchase. Because a property is purchased “as is,” a seller has no obligation to disclose anything, meaninig, that a buyer cannot seek redress for any defects to the property or its chain of title discovered after the closing has taken place. As a result, prior to buying a house–or any property–it is physically inspected and the chain of title carefully examined. There are two exceptions to this rule: (i) Where a seller creates a defect that cannot be found by a buyer in an ordinary inspection, referred to sometimes as a seller’s “active concealment” and (ii) where the parties are in some confidential relationship that requires a seller to disclose any information that could affect the property (these are infrequently found).

The buyer in this case sought to rescind the contract because the house he had agreed to buy was reportedly haunted. This fact was reported by some news outlets after the seller announced that it was haunted and allowed for it to be a tourist spot. The buyer, however, was not from the area and had no knowledge of the property’s reputation. When the seller refused to cancel the deal, the buyer sued to rescind the sales contract. The trial court denied the buyer any relief, but the Appellate Division, First Department, reversed. The Appellate Division’s description of the facts and principles are colorful and I quote some of it here.

November 8, 2012

Special Relationship May Defeat Usury Defense

by The Silber Law Firm LLC

Plaintiff sought to recover from a corporation and its shareholders a total of $106,000 based on a $15,000 loan. Defendants denied liability and raised usury as an additional defense. Both sides moved for summary judgment, the plaintiff on the note and the defendants on their defense of usury. In opposition to the usury defense, the plaintiff claimed that the amount in excess of $15,000 was not interest but a combination of smaller loans that were consolidated and included in the repayment for ease of reference and to be repaid all at one time.

In addressing the usury defense, Kings County Commercial Division Judge Carolyn E. Demarest, agreed that if the interest charged was usurious, the lender could not collect. However, in this case, it was the borrower-defendant that drafted the loan documents, proposed the interest rate and payment options, and assured the lender-plaintiff that it was all legal and enforceable. Additionally, the defendants were plaintiff’s investment brokers and were hired to research and make investments for him. In that setting found the court, to avoid a situation where “‘a borrower could void the transaction, keep the principal, and achieve a total windfall, at the expense of an innocent person, through his [or her] subterfuge and inequitable deception'” a usury defense could not stand.

The court found a related basis not to allow the defendant to hide behind the usury defense. Where the parties entered into the loan based on the relationship of trust between them, and the plaintiff’s relied on that relationship, the borrower will not be rewarded for his scheming and misleading conduct. Thus, where a relationship “results in a borrower inducing the lender to make a loan at a usurious rate” the court may not void the loan because it is usurious. Instead, the court will enforce the loan at a legal rate of interest.

October 18, 2012

Gifts Cannot be Forced

by The Silber Law Firm LLC

Towbin v. Towbin reminds us that one cannot be compelled to give someone a gift. The facts here involve a son’s attempt to compel his parents to complete the transaction of giving a trust he controlled a valuable apartment which his parents owned and in which they lived. The lawsuit sought to force his parents to complete the transaction they had started and thought had completed, evict them, and award him $12 million in damages.

The court dismissed the case, refusing to compel the completion of the gift, stating that because the transaction had not been properly completed, notwithstanding the intention of plaintiff’s parents, the gift was never finalized and the son had no basis for his claims.

September 12, 2012

So Poker Is Not Illegal? Not So Fast

by The Silber Law Firm LLC

A recent decision by Senior Judge Jack B. Weinstein in United States of America v. DiCristina dismissed claims against the defendant because the gambling complained of did not violate the Illegal Gambling Business Act.

Read some important highlights here

For a discussion about permitted sweepstakes vs. illegal gambling, have a read at a prior post.