New York Lien Law and Insurance For

NEW YORK LIEN LAW AND INSURANCE FOR

PROJECTS: A PRACTICAL LOOK Prepared in connection with a Continuing Legal Education course presented

CLE at New York County Lawyers’ Association, 14 Vesey Street, New York, NY

scheduled for February 26, 2015

Program Co-sponsors: NYCLA Construction Law Committee, Insurance Law Committee and Real Estate Section

Program Chair: Ariel Weinstock, Katsy Korins LLP

Faculty: Thomas Donohue, Baldon Group, Inc. Insurance; Al Stork, Lex Terrae Ltd/Old Republic National Title Insurance Company

NYCLA

This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3 Transitional and Non-Transitional credit hours: 2 Professional Practice/Law Practice Management; 1 Skills. This program has been approved by the Board of Continuing Legal education of the Supreme Court of New Jersey for 3 hours of total CLE credits. Of these, 0 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal law, workers compensation law and/or matrimonial law. ACCREDITED PROVIDER STATUS: NYCLA’s CLE Institute is currently certified as an Accredited Provider of continuing legal education in the States of New York and New Jersey.

Information Regarding CLE Credits and Certification New York Lien Law and Insurance for Construction Projects: A Practical Look February 26, 2015; 6:00 PM to 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

New York Lien Law and Insurance for Construction Projects: A Practical Look

Thursday, February 26, 2015 6:00 PM to 9:00 PM

Program Co-sponsors: NYCLA Construction Law Committee, Insurance Law Committee and Real Estate Section

Program Chair: Ariel Weinstock, Katsy Korins LLP Faculty: Thomas Donohue, Baldon Group, Inc. Insurance; Al Stork, Lex Terrae Ltd/Old Republic National Title Insurance Company

AGENDA

5:30 PM – 6:00 PM Registration

6:00 PM – 6:10 PM Introductions and Announcements

6:10 PM – 9:00 PM Presentation and Discussion

*** There will be two 10 minute breaks taken during the program.

2/23/2015

The NY Lien Law (Articles 2 and 3), Mechanic Liens, Building Loans and Applicable Case Law February 2015

Al Stork Senior Counsel

Old Republic National Title Insurance Company/ Lex Terrae, Ltd

Old Republic Title Insurance Group Who We Are

• Over 250 offices, 4,000 employees, 8,200 agents • Nationwide reach – all 50 states • The fastest growing national title insurance company in the nation • Full line of title insurance & real estate settlement services • Emphasis on ethics & accountability • Industry leading financial strength ratings, strong balance sheet, conservative reserving

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Old Republic International About Our Parent

• We are owned by Old Republic International • One of the nation’s 50 largest publicly held insurance organizations • Traded on the New York Stock Exchange, member of the Fortune 500 • 30 consecutive years of dividend growth • Over $16 billion in assets and over $3.7 billion in shareholders’ equity • Managed for the long run

Balance Sheet Comparisons Consolidated GAAP as of 12/31/2013

$16.0

$14.0

$12.0

$10.0

$8.0 $'s in Billions $'s in $6.0

$4.0

$2.0

$0.0 ORI Fidelity 1st Amer Stewart Assets $16.5 $10.5 $6.5 $1.3 Reserves & Equity $13.2 $7.2 $3.5 $1.2

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Title Industry Market Share By Underwriting Family

Market Share Inc (Dec)

Yr 2008 Yr 2009 Yr 2010 Yr 2011 Yr 2012 Yr 2013 6 mo's 14 08 to 14

Fidelity 45.3% 41.6% 40.8% 37.6% 36.8% 34.6% 32.9% ‐27.4%

1st American 29.1% 27.8% 26.7% 26.8% 26.3% 26.9% 27.5% ‐5.5%

ORT 5.6% 8.1% 11.0% 13.0% 13.5% 14.9% 14.8% 164.3%

Stewart 12.6% 14.5% 13.7% 13.7% 13.0% 12.2% 12.7% 0.8%

Regionals 7.4% 8.0% 7.8% 8.9% 10.4% 11.4% 12.1% 63.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Per ALTA statistics based on total premiums written. Market share for all years reflect the current family organization structure.

Overview

•Purpose of the lien law

•Mechanic’s liens (filing, priority, duration, how discharged)

•Building loan contracts and how to ensure priority over potential mechanic’s liens

•Applicable Case Law

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Purpose of Lien Law

•Enacted to protect those parties who were not paid for labor performed or materials furnishedinconnectionwith the improvement of real property

What is a mechanic’s lien ?

•Created by state statute; secures priority of payment of the price or value of work performed and materials furnished in erecting or repairing a building or other structure •Attaches to the land as well as buildings and improvements erected thereon •Encumbers real property at the time a notice of lien is filed •No need for judicial approval prior to filing a mechanic’s lien •Challenges to the constitutionality of the lien law based upon a claim of deprivation of property without due process of law have been rejected. (Warren’s Weed NY real property, Mechanic’s liens, Section 1.03) •May be foreclosed pursuant to the provisions of the RPAPL. (Section 43 NYS Lien Law)

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Filing a Mechanic’s Lien

•The right is afforded to a contractor, subcontractor, laborer, material men, landscape gardener, nurseryman or person or corporation selling fruit or ornamental trees, roses, shrubbery, vines and small fruits who performs labor or who furnishes materials for the improvement of real property with the consent or at the request of the owner or owner’s agent, contractor or subcontractor (Section 3 of the Lien Law)

•What happens if works to the premises is ordered by a lessee and a mechanics lien is filed?

•It is a question of fact as to whether the work was done with the consent or at the request of the fee owner or his agent

Filing a Mechanic’s Lien

If the lease requires the lessee to make improvements (not as general requirement to keep the premises in good repair), then the lessors consent will be found.

Other factors to consider are: •If lessor fails to object to the improvement; •If lessor receives a benefit from the improvement; •If lessor gives a credit for improvement; •If lessor signs for authorization of plans for government authority; •If lessor expresses satisfaction with the work; •If lessor fails to attempt to stop the work; •If lessor waives a lease provision requiring his approval for the work;

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Filing a Mechanic’s Lien

•If lessor is aware of improvements being made prior to execution of formal lease;

•If lessor submits an application to municipality to have improvements connected with utility services. (Warren’s Weed NY Real Property, Mechanic liens, Section 2.03)

•This analysis applies to coop unit leases also.

•Section 2 (4) of the Lien Law defines “improvements” and items for which a mechanic’s lien may be filed

•Lienor’s can obtain a lien by filing a notice of lien in the County Clerk’s office in the County in which the real property is located

Filing a Mechanic’s Lien

• Section 9: Notice of lien contents

• Section 10: Lien must be filed within 8 months (or 4 months for a single family dwelling) after the completion of the contract or the final performance of the work or the furnishing of materials dating from the last item of work performed or materials furnished. Provided further where the notice of lien is for retainage, the notice of lien may be filed within 90 days after the date the retainage was due to be released.

• Section 11: A Lienor must serve the owner of the premises within 5 days before or within 30 days after filing a notice of lien in the county clerk’s office

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Priority of Liens

•Section 13(1): all liens shall be on a parity (Except as set forth in Section 56; and except that in all cases laborers for daily or weekly wages shall have preference over all other claimants under this article) •Title companies do not usually escrow for mechanic’s liens due to this provision. If there is a lien filed at the time of a closing for say $ 10,000 and title company escrows for same, and a new mechanic’s lien is then filed for $ 1,000,000 after the closing. The $ 1,000,000 mechanic’s lien will have the same priority as the $10,000 mechanic’s lien and if the title company cannot collect from the seller or owner of the premises the title company may be stuck with a $ 1,000,000 claim to cover the discharging of said $ 1,000,000 mechanic’s lien •While the Lien Laws purpose is to protect parties who do work to and supply materials to premises it also affords a way for parties purchasing or providing funds to the owner of the premises with a way of protecting their purchase or mortgage from being subordinated to mechanic’s liens

Priority of Liens

•If no lien is filed at the time a deed or a mortgage is delivered (for actual consideration) and even if there was ongoing work being done at the premises then provided that said deed or mortgage has a section 13 lien clause to the effect:

For a deed (Section 13(5)):

AND the party of the first part, in compliance with Section 13 of the Lien Law, covenants that the party of the first part will receive the consideration for this conveyance and will hold the right to receive such consideration as a trust fund to be applied first for the purpose of paying the cost of the improvement and will apply the same first to the payment of the cost of the improvement before using any part of the total of the same for any other purpose.

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Priority of Liens

For a mortgage (Section 13(3)) : That the mortgagor will, in compliance with Section 13 of the Lien Law, receive the advances secured hereby and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement and will apply the same first to the payment of the cost of improvement before using any part of the total of the same for any other purpose. It is also sufficient to state: “Subject to the trust fund provisions of section 13 of the lien law.” •Then said deed or mortgage will have priority over a subsequently filed mechanic’s lien •If the deed or mortgage or other type of conveyance (i.e. lease or assignment of lease) does not have a section 13 Lien clause then said instrument will be subject to a lien filed after the delivery of said conveyance provided said liens are filed within 8 months (or 4 months for single family dwellings) after the final work is done on the premises (or within 90 days after the date the retainage was due to be released). Lienors have an inchoate lien that relates back to when the work was done. (Section 13 NYS Lien Law)

In Leonard Engineering, Inc. V. Zephyr Petroleum Corporation 522 NYS2d 900

In Leonard Engineering, Inc, v. Zephyr Petroleum Corporation 522 NYS2d 900 a deed was delivered prior to the filing of a mechanic’s lien but recorded after the filing of the mechanic’s lien. The court held that since the deed had section 13 lien clause the deed had priority over the mechanic’s lien. This is a second department Appellate Division case. It could arguably also apply to mortgages that are delivered prior to the filing of a mechanic’s lien but recorded after the mechanic’s lien is filed.

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Monroe Sav. Bank v First Nat'l Bank (1976, 4th Dept) 50 App Div 2d 314, 377 NYS2d 827

Mortgage that contains a section 13(3) trust fund clause but given to secure only an antecedent debt does not have priority over subsequently filed mechanic liens.

Duration of Mechanic’s Lien

•Section 17: a mechanic’s lien shall remain a lien on the premises for 1 year from the date it is filed in the County Clerk’s office

•Can be extended as a right for 1 year (except need court order 1-4 family)

•Can be extended for another year by court order

•Also extended if a lis pendens is filed to foreclose the lien or if the lienor is named as a defendant in an action to enforce another lien and said other lienor files a lis pendens

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Condominium Act Section 339-I of RPL

•Section 339-I of the Real Property Law prohibits the filing of a mechanic’s lien against the common elements unless there was unanimous consent of the unit owners

• A mechanic can only file a lien against the units and common elements of the unit owners who consent to the work.

Discharge of Mechanic’s Lien

•Section 19: lien can be discharged by:

•A certificate filed by the lienor stating that the lien is satisfied or released •An order of the court if the lienor neglects to prosecute the lien (section 59 of the lien law) •Filing a bond with the county clerk in an amount equal to 110% of the lien. The lien would then attach to the bond in the place of the real property. In the exhibits there are instructions provided by the NY County Clerk’s office setting forth what they need to have filed in order to discharge a mechanic’s lien by bond along with a redacted Affirmation in support of filing of lien discharge bond with accompanying exhibits. •By filing with the County Clerk a transcript of judgment with proof of service of notice of entry showing a final determination of the action in favor of the owner of the premises

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Discharge of Mechanic’s Lien

•Where it appears from the face of the notice of lien that the claimant does not have a valid lien the owner or other party in interest may apply to an appropriate court for an order summarily discharging of record the alleged lien. If approved an order shall be made discharging the lien of record.

•Section 20: lien can be discharged by depositing the amount of the lien plus interest with the County Clerk:

Note: A subcontractor’s lien is limited to funds owed by the owner to the general contractors at the time the lien is filed. If a general contractor has been paid in full then the subcontractor is not entitled to a mechanic’s lien on the owner’s property. (Lien Law Section 4) ( Robert P. Frink v. Dudley Bierau et al 212 NYS2d 869)

Miscellaneous Lien Law Sections

• Section 34: Waiver of lien Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable. This section shall not preclude a requirement for a written waiver of the right to file a mechanic's lien executed and delivered by a contractor, subcontractor, material supplier or laborer simultaneously with or after payment for the labor performed or the materials furnished has been made to such contractor, subcontractor, material man or laborer nor shall this section be applicable to a written agreement to subordinate, release or satisfy all or part of such a lien made after a notice of lien has been filed. (attached is allowable lien waiver form) • Section 37: Allows for the filing of a bond to discharge all liens before or after the commencement of the improvement. • Section 39: Lien wilfully exaggerated is void • Section 39-a: Provides for liability of lienor where lien has been declared void on account of wilful exaggeration

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Building Loan Contract - Definition

•Section 2:

The term "building loan contract," when used in this chapter, means a contract whereby a party thereto, in this chapter termed "lender," in consideration of the express promise of an owner to make an improvement upon real property, agrees to make advances to or for the account of such owner to be secured by a mortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid in purchasing from or in selling for such owner bonds or certificates secured by such mortgage upon such real property, providing, however, nothing herein contained shall be deemed to construe as a building loan contract a preliminary application for a building loan made by such owner and accepted by such lender if, pursuant to such application and acceptance, a building loan contract is thereafter entered into between the owner and the lender and filed as provided in section twenty-two of this chapter.

Pending Disbursement Clause

•Since BLA provide for advances to be made over time, when title insurers insure a building loan mortgage the policy contains a pending disbursement clause as follows: Pending disbursement of the full proceeds of the loan secured by the mortgage described herein, this policy insures only to the extent of the amount actually disbursed plus interest accrued thereon, but increases as disbursements are made in good faith and without knowledge of any defects in, or objections to, the title, up to the face amount of the policy. Title shall be continued down to the date of each disbursement and the Company shall furnish to the mortgagee a continuation report, stating whether since the date hereof or since the date of the last preceding continuation report any liens or encumbrances have been recorded, whether any taxes, assessments, or other charges of whatever nature which have become due and payable have been paid, whether there are survey variations, encroachments, or violations of setback and whether there are any additional title exceptions or objections. In the event that the lien of the mortgage described herein is insured by more than one insurer, this Company agrees that it shall be bound by the continuation reports of a single company specified as "lead" insurer herein.

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Building Loan Contracts - Priority

•The lender must comply with the terms of the Lien Law, file a building loan contract and record a building loan mortgage in compliance with Sections 13 and 22 of the Lien Law

•If a lender makes a loan to an owner for improvements to be made to real property then a building loan agreement must be filed pursuant to section 22 of the Lien Law and a building loan mortgage must be recorded. A building loan mortgage must contain the section 13 Lien Law clause. (Under certain circumstances a building loan agreement also needs a section 13 lien law clause; title insurers always request that the BLM and BLA contain said lien law clause.) (See attached form of BLA and BLM. Note that both forms contain a Lien Law Section 13 trust clause.)

Filing the Building Loan Agreement

•Must be filed in the County Clerk’s office on or before the same date that the BLM gets recorded in the Register’s office

•If the BLM gets recorded prior to the date that the BLA is filed then the BLM will be subordinate to the lien of any party that files a notice of lien

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Section 22 Affidavit

The BLA must contain a Section 22 affidavit

•Filed to give parties who do work or supply materials to the premises notice as to how much money is available from the BL lender for the particular project

•Sets forth: •the consideration paid or to be paid for the loan •all other expenses, if any incurred •the net sum available to borrower for the improvement

Section 22 Affidavit

•The amounts that the lender and borrower can deduct from said loan must fit into the definition of “Cost of Improvement” as set forth in Section 2 (5) of the Lien Law • Permissible deductions for the Section 22 affidavit include: 1. Title charges for BLM 2. Interest on building loan during construction 3. Mortgage tax for BLM 4. Recording fees for BLM 5. Taxes, assessments, water and sewer rents paid or to be paid for periods prior to or during construction 6. Bank inspection and appraisal charges 7. Insurance premiums during construction 8. Reasonable mortgage broker commissions and lender's attorney's fees for BLM 9. Sums paid to take by assignment prior existing mortgages which are consolidated with the building loan mortgage or to discharge the mortgages or in reduction thereof and accrued interest thereon 10.Architects, engineers or surveyors fees 11.Premiums on bonds or bonds filed to discharge liens 12.Reimbursement to the owner of payments for above expenses made prior to the date of the initial advance on building loan, and for cost of improvement expenses such as payroll taxes and labor and materials. • Non-permissible expenses: 1. Land acquisition costs 2. “soft costs", e.g. advertising, managing agents, brochures 3. Non-reasonable expenses

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Section 22 Affidavit

•If there is a material misrepresentation in the Section 22 affidavit then the entire BLM will be subordinated to a notice of lien filed by a mechanic’s lienor. ( Nanuet Nat’l Bank v. Eckerson Terrace, Inc. 417 N.Y.S.2d 901)

•Detrimental reliance by a potential mechanic lienor is not required. (HNC Realty Co. v. Golan Heights Developers, 360 N.Y.S.2d 954)

•The Lien Law can be harsh and the courts interpret it harshly so lenders and their attorneys are well advised to follow the mandates of said statute strictly

Modification of a Building Loan Agreement

•If a lender and borrower modify a BLA then the modification must be filed within 10 days of it’s earliest execution or the lender’s BLM will be subordinated to later filed mechanic liens

•Section 22: a modification of a BLA shall not affect or impair the rights or interest of a person who previous to the filing of such modification had furnished materials or had performed or contracted to perform labor for the improvement of real property but such right or interest should be determined by the original contract

•To insure the modification of a BLA, title companies require that said modification be consented to by all parties who have supplied materials, work, labor, and or services prior to the filing of said modification agreement

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Material Modifications to Building Loan Agreements

•Not all modifications of BLA are considered to be material but a modification is material if it:

•Alters the rights and liabilities otherwise existing between the parties to the agreement; or

•Enlarges, restricts, or impairs the rights of any third party beneficiary to the agreement (i.e. a mechanic’s lienor)

(Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S.2d 882; HNC Realty Company v. Bay View Tower Apartments Inc.)

Examples of Material Modifications

Change of the central terms of the BLA, such as amount or manner of payment

•Modification of BLA which deals with consideration paid for loan expenses incurred, or net sum available

•Substitution of a faithful performance accounting bond for a surety payment bond

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Examples of Material Modifications

If the premises are sold during the life of a BLA: •A tri-partite agreement by the seller-assignor, mortgagor - assignee - purchaser, and the mortgagee •The purchaser must assume all of the terms, covenants, and conditions under the agreement and agree to hold the advances to be made under Section 13 of the Lien Law •The mortgagee must consent to the assignment of the building loan agreement •The agreement must be filed within ten (10) days from the earliest execution date and consented to by all persons who have supplied work, labor, and services prior to the filing of the within agreement

Examples of Material Modifications

If the loan is assigned during the life of a BLA: •The owner, old lender and new lender must enter into a tri-partite agreement •The new lender must assume the obligations of the BLA •The agreement must be filed within ten (10) days from the earliest execution date and consented to by all persons who have supplied work, labor, and services prior to the filing of the within agreement (But see International Exterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. et al. 2011 N.Y. Misc. LEXIS 2777; 2011 NY Slip op 315454) Lienor’s knowledge of a material modification does not relieve parties to the BLA of the obligation to file a modification of the BLA in compliance with Section 22 of the Lien Law. (Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S.2d 882)

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Non-material modifications

• Mere extension of the BLA

• Mere extension of the completion date of the project. (The New York Savings Bank v. Wendell Apartments, Inc., 245 N.Y. S.2d 827)

• Waiver of the right to hold borrower in default even though the building loan contract would allow the lender to do so (Howard Savings Bank v. Lefcon Partnership 618 N.Y.S 2d 910 )

• Arguably when there is an assignment of the BLA and BLM to a new lender who adds more money and files an amended and restated BLA and then records an amended and restated BLM. (International Exterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. etal. 2011 N.Y. Misc. LEXIS 277;)

Project Loan Agreement

•If the borrower needs to borrow money for non-permissible BL costs (costs that are not within the definition of improvement as set forth in Section 2 (4) of the Lien Law) the lender will usually lend said sums pursuant to a separate project loan agreement and project loan mortgage •Typically a PLA is not filed in the county clerk’s office as is a BLA •However: Lehman Brothers Holding, Inc. v. 25 Broad, LLC 2011 NY slip op319314; 2011 NY Misc. Lexis 3543). Construed a Project Loan Agreement to be a Building Loan Contract and since it was not filed in the County Clerks office pursuant to Section 22 of the Lien Law the project loan mortgage was subordinated to the mechanic’s liens •PLAs should be drafted in a way that they cannot be construed to be a BLA •Consideration should be given to including a clause in the PLA to the effect that no portion of the proceeds for the PL are being used for the improvement of the premises.

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Bifurcated Loan Agreements and mortgages – Divided Case Law resolved by The Court of Appeals (2013)

•Some lenders draw up very sophisticated papers which should arguably not cause the lender to lose priority to subsequently filed mechanic liens •In some cases, lenders provide for BLAs that refer to acquisition costs, BL costs and PL costs •Supportive case law: (Yankee Bank For Finance & Savings, FSB v. Task Associates etal. 731 F. Supp. 64) •Case law which was not supportive: ( Atlantic Bank of New York v. Forrest House Holding Company et al. 651 N.Y.S.2d 607) •Court of Appeals Case: (Altshaler Shaham Provident Funds, Ltd. v. GML Tower, LLC 21 N.Y. 3d 352) •Lenders should do their best to strictly comply with the terms of the Lien Law so that they are in a position (in a foreclosure scenario) to obtain a summary judgment in their favor allowing them to foreclose their BLMs PLMs or Acquisition mortgages over any mechanic liens •Not Recommended: Bifurcated or trifurcated loan documents. (Despite 2013 Court of Appeals decision)

Recommended Priority of Mortgages

1. Acquisition Mortgage; 2. Building Loan Mortgage; 3. Project Loan Mortgage;

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Escrow Mortgages (Secured)

•After the money is lent, the lenders require the borrower to put part of the money into an escrow account and provide that said funds be used to make repairs or improvements to the premises

•We do not recommend this type of an arrangement. If money is being lent from a lender to a borrower in order to have premises improved then a building loan agreement should be filed and section 22 of the Lien Law should be complied with

Escrow Mortgages Case Law Example

Lehman Brothers Holdings Inc v. Genwood Strathallar LLC 2011 NY Misc. Lexis 6154 •Since the loan constituted a building loan agreement under the lien law and since a building loan agreement was not filed in compliance with section 22 of the lien law the mechanic’s lienors had priority over the mortgage •The foreclosing mortgagee asserted that the Consolidated Note, the Loan Agreement and the mortgage did not contain the borrower’s express promise to make an improvement at the property, which is an element of a building loan contract •The Court ruled that the Loan Agreement and the two Repair Escrow Agreements “must be read together for purposes of determining whether this is a building loan contract” •The mortgagee asserted that the loan was not a building loan because funds were disbursed at one time and not as advances over time •The court determined that “the money was not made available to the borrowers in a lump sum, the funds could not be used for any other purpose than for repairs, and could only be disbursed by permission of the lender upon request of the borrower as the work was completed”

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Notices of Lending – Case Law

• Many lenders are now filing Notices of Lending pursuant to Section 73 of the Lien Law along with their BLAs

• Why: Court of Appeals decision in Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A.

• Title companies do not require the filing of the notice of lending since the mechanic lienor claims under Article 3A of the Lien Law are not within the coverage of the title policy

National Mechanic’s Liens Types

There a 3 basic state statutory schemes nationally:

•Where the lien priority is established when the labor or materials are provided, so long as a mechanic’s lien is filed. The lien priority relates back to when the work or materials were furnished. NY falls within this scheme

•Where the priority of the lien is established by the filing of the lien or by a notice of commencement

•Where priority is established by the initiation of judicial action

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Old Republic / Lex Terrae

For all title-related inquiries: Al Stork [email protected] 212-599-1300 (Office) 212-551-2224 (Direct)

22 Exhibits

Exhibit A: NYCLS Lien § 43 Exhibit B: NYCLS Lien § 3 Exhibit C: NYCLS Lien § 2 Exhibit D: NYCLS Lien § 9 Exhibit E: NYCLS Lien § 10 Exhibit F: NYCLS Lien § 11 Exhibit G: NYCLS Lien § 13 Exhibit H: Leonard Engineering, Inc. v. Zephhyr Petroleum Corporation 522 N.Y.S. 2d 900 Exhibit I:Monroe Saving Bank v. First Nat’l Bank 50 App. Div. 2d 314, 377 NYS2d 827 Exhibit J: NYCLS Lien § 17 Exhibit K: NYCLS Real P § 339 -I Exhibit L: NYCLS Lien § 19 Exhibit M:NYCLS Lien § 59 Exhibit N:NYCLS Lien § 20 Exhibit O: NYCLS Lien § 4 Exhibit P: Robert P. Frink v. Dudley Bierau et al 212 N.Y.S. 2d 869 Exhibit Q: County Clerk's instruction (Bond) Exhibit R: Affirmation for bond-discharge (NY County) Exhibit S: NYCLS Lien § 34 Exhibit T:Form Waiver Exhibit U: NYCLS Lien § 37 Exhibit V: NYCLS Lien § 39 Exhibit W: NYCLS Lien § 39a Exhibit X: NYCLS Lien § 22 Exhibit Y: Title Company Checklists Exhibit Z: Building Loan Agreement Exhibit AA: Building Loan Mortgage Exhibit BB: Form Section 22 Affidavit Exhibit CC: Nanuet Nat'l Bank v. Eckerson Terrace, Inc.417 N.Y.S. 2d 901

Lien Law Exhibits Exhibit DD: HNC Realty Co.v. Golan Heights Developers, 360 N.Y.S 2d 954 Exhibit EE: Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S. 2d 882 Exhibit FF: HNC Realty Company v. Bay View Tower Apartments Inc. 64 A.D.2d 417; 409 N.Y.S.2d 774 Exhibit GG: International Exterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. et al. 2011 N.Y. Misc. Lexis 2777 Exhibits HH: The New York Savings Bank v. Wendell Apartments, Inc., 245 N.Y.S. 2d 827 Exhibit II: Howard Savings Bank v. Lefcon Partnership 618 N.Y.S. 2d 910 Exhibit JJ: Lehman Brothers Holding, Inc. V. 25 Broad, LLC 2011 NY slip op319314; 2011 NY Misc. Lexis 3543 Exhibit KK: Yankee Bank for Finance and Savings, FSB v. Task Associates et al. 731 F. Supp. 64 Exhibit LL: Atlantic Bank of New York v. Forrest House Holding Company et al. 651 N.Y.S. 2d 607 Exhibit MM: Altshuler Shaham Provident Fund, Ltd v. GML Tower LLC 21 N.Y. 3D 352 Exhibit NN: Lehman Brothers Holdings Inc v. Genwood Strathaller LLC 2011 NY Misc. Lexis 6154 Exhibit OO: Aspro Mechanical Contracting, Inc. v. Fleetbank, N.A. 1 N.Y. 3d 324; 773 N.Y.S. 2d 735 Exhibit PP : NYCLS Lien § 73 Exhibit QQ: Notice of Lending Form Exhibit RR: Title Loan Policy Form

Lien Law Exhibits Exhibit A: NYCLS Lien § 43

Exhibit B: NYCLS Lien § 3

Exhibit C: NYCLS Lien § 2 Page 1

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LIEN LAW ARTICLE 1. SHORT TITLE; DEFINITIONS

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NY CLS Lien § 2 (2014)

§ 2. Definitions

1. Lienor. The term "lienor," when used in this chapter, means any person having a lien upon property by virtue of its provisions, and includes his successor in interest.

2. Real property. The term "real property," when used in this chapter, includes real estate, lands, tenements and hereditaments, corporeal and incorporeal, fixtures, and all bridges and trestle work, and structures connected therewith, erected for the use of railroads, and all oil or gas wells and structures and fixtures connected therewith, and any lease of oil lands or other right to operate for the production of oil or gas upon such lands, and the right of franchise granted by a public corporation for the use of the streets or public places thereof, and all structures placed thereon for the use of such right or franchise.

3. Owner. The term "owner," when used in this chapter, includes the owner in fee of real property, or of a less estate therein, a lessee for a term of years, a vendee in possession under a contract for the purchase of such real property, and all persons having any right, title or interest in such real property, which may be sold under an execution in pursuance of the provisions of statutes relating to the enforcement of liens of judgment, and all persons having any right or franchise granted by a public corporation to use the streets and public places thereof, and any right, title or interest in and to such franchise. The purchaser of real property at a statutory or judicial sale shall be deemed the owner thereof from the time of such sale. If the purchaser at such sale fails to complete the purchase, pursuant to the terms of the sale, all liens created by his consent after such sale shall be a lien on any deposit made by him and not on the real property sold.

4. Improvement. The term "improvement," when used in this chapter, includes the demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement, and shall also include any work done or materials furnished in equipping any such structure with any chandeliers, brackets or other fixtures or apparatus for supplying gas or electric light and shall also include the drawing by any architect or engineer or surveyor, of any plans or Page 2 NY CLS Lien § 2

specifications or survey, which are prepared for or used in connection with such improvement and shall also include the value of materials actually manufactured for but not delivered to the real property, and shall also include the reasonable rental value for the period of actual use of machinery, tools and equipment and the value of compressed gases furnished for welding or cutting in connection with the demolition, erection, alteration or repair of any real property, and the value of fuel and lubricants consumed by machinery operating on the improvement, or by motor vehicles owned, operated or controlled by the owner, or a contractor or subcontractor while engaged exclusively in the transportation of materials to or from the improvement for the purposes thereof and shall also include the performance of real estate brokerage services in obtaining a lessee for a term of more than three years of all or any part of real property to be used for other than residential purposes pursuant to a written contract of brokerage employment or compensation.

5. Cost of improvement. The term "cost of improvement," when used in this chapter, means expenditures incurred by the owner in paying the claims of a contractor, an architect, engineer or surveyor, a subcontractor, laborer and materialman, arising out of the improvement, and in paying the amount of taxes based on payrolls including such persons and withheld or required to be withheld and taxes based on the purchase price or value of materials or equipment required to be installed or furnished in connection with the performance of the improvement, payment of taxes and unemployment insurance and other contributions due by reason of the employment out of which any such claim arose, and payment of any benefits or wage supplements or the amounts necessary to provide such benefits or furnish such supplements, to the extent that the owner, as employer, is obligated to pay or provide such benefits or furnish such supplements by any agreement to which he is a party, and shall also include fair and reasonable sums paid for obtaining building loan and subsequent financing, premiums on bond or bonds filed pursuant to section thirty-seven of this chapter or required by any such building loan contract or by any lease to be mortgaged pursuant thereto, or required by any mortgage to be subordinated to the building loan mortgage, premiums on bond or bonds filed to discharge liens, sums paid to take by assignment prior existing mortgages, which are consolidated with building loan mortgages and also the interest charges on such mortgages, sums paid to discharge or reduce the indebtedness under mortgages and accrued interest thereon and other encumbrances upon real estate existing prior to the time when the lien provided for in this chapter may attach, sums paid to discharge building loan mortgages whenever recorded, taxes, assessments and water rents existing prior to the commencement of the improvement, and also those accruing during the making of the improvement, and interest on building loan mortgages, ground rent and premiums on insurance likewise accruing during the making of the improvement. The application of the proceeds of any building loan mortgage or other mortgage to reimburse the owner for any payments made for any of the above mentioned items for said improvement prior to the date of the initial advance received under the building loan mortgage or other mortgage shall be deemed to be an expenditure within the "cost of improvement" as above defined; provided, however, such payments are itemized in the building loan contract and/or other mortgage other than a building loan mortgage, and provided further, that the payments have been made subsequent to the commencement of the improvement.

5-a. Benefits and wage supplements. The term "benefits and wage supplements" as used in this chapter means all remuneration for employment paid in any medium other than cash, or reimbursement for expenses, or any payments which are not "wages" within the meaning of the law, including, but not limited to, health, welfare, non-occupational disability, retirement, vacation benefits, holiday pay and life insurance.

6. Public corporation. The term "public corporation," when used in this chapter, means a municipal corporation or a district corporation or a public benefit corporation as such corporations are defined in section three of the general corporation law.

7. Public improvement. The term "public improvement," when used in this chapter, means an improvement of any real property belonging to the state or a public corporation; however, if the beneficial interest of an improvement is in an entity other than the state or a public corporation notwithstanding legal title being vested in an industrial development agency created under article eighteen-A of the general municipal law, then such improvement shall be considered an improvement of real property subject to mechanics' liens on real property as provided in section three of this chapter. Nothing contained in this section shall create or be deemed to create any liability upon any industrial development Page 3 NY CLS Lien § 2

agency for the payment of the cost of any improvement, or otherwise. For the purposes of this subdivision the term "beneficial interest" shall mean the beneficial incidents of ownership of the improvement to include, but not be limited to, the right to possession, the right to claim tax benefits, if any, and the right to purchase or secure title to the improvement pursuant to an executory contract of sale, option agreement or lease.

8. Improvement of real property. The term "improvement of real property," when used in this chapter, means any improvement of real property not belonging to the state or a public corporation.

9. Contractor. The term "contractor," when used in this chapter, means a person who enters into a contract with the owner of real property for the improvement thereof, or with the state or a public corporation for a public improvement.

10. Subcontractor. The term "subcontractor" when used in this chapter, means a person who enters into a contract with a contractor and/or with a subcontractor for the improvement of such real property or such public improvement or with a person who has contracted with or through such contractor for the performance of his contract or any part thereof.

11. Laborer. The term "laborer," when used in this chapter, means any person who performs labor or services upon such improvement.

12. Materialman. The term "materialman" when used in this chapter, means any person who furnishes material or the use of machinery, tools, or equipment, or compressed gases for welding or cutting, or fuel or lubricants for the operation of machinery or motor vehicles, either to an owner, contractor or subcontractor, for, or in the prosecution of such improvement.

The expression "furnishes material" or other similar expression wherever used in this chapter, shall be deemed to mean and include the reasonable rental value for the period of actual use of machinery, tools or equipment, and the value of compressed gases furnished for welding or cutting, and the value of fuel and lubricants consumed by machinery operating on, [n1] [n1] or by motor vehicles owned, operated or controlled by the owner, or a contractor or subcontractor while engaged exclusively in the transportation of materials to or from the improvement for the purposes thereof.

13. Building loan contract. The term "building loan contract," when used in this chapter, means a contract whereby a party thereto, in this chapter termed "lender," in consideration of the express promise of an owner to make an improvement upon real property, agrees to make advances to or for the account of such owner to be secured by a mortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid in purchasing from or in selling for such owner bonds or certificates secured by such mortgage upon such real property, providing, however, nothing herein contained shall be deemed to construe as a building loan contract a preliminary application for a building loan made by such owner and accepted by such lender if, pursuant to such application and acceptance, a building loan contract is thereafter entered into between the owner and the lender and filed as provided in section twenty-two of this chapter.

14. Building loan mortgage. The term "building loan mortgage," when used in this chapter, means a mortgage made pursuant to a building loan contract and includes an agreement wherein and whereby a building loan mortgage is consolidated with existing mortgages so as to constitute one lien upon the mortgaged property.

15. Subsequent financing. By the term "subsequent financing" is meant moneys borrowed upon the security of the improvement after the recording of a building loan contract and/or mortgage other than a building loan mortgage upon the premises to be improved and within four months after the completion thereof.

16. Prior mortgage. By the term "prior mortgage" is meant a mortgage on real property and/or leasehold recorded prior to the commencement of an improvement thereon. Page 4 NY CLS Lien § 2

17. Consideration. The term "consideration" when used in this chapter, includes real property as defined in section two hereof, and personal property as defined in section thirty-nine of the general construction law.

18. Advances. The term "advances" when used in this chapter, includes money, real property as defined in section two hereof and/or personal property as defined in section thirty-nine of the general construction law.

19. Funds. The term "funds" when used in this chapter, includes money, real property as defined in section two hereof and/or personal property as defined in section thirty-nine of the general construction law.

20. Persons. The term "persons" when used in this chapter, includes an individual, partnership, association, trust or corporation.

HISTORY: Add, L 1909, ch 38; amd, L 1914, ch 506, § 1, L 1916, ch 507, § 1, L 1929, ch 515, § 1, L 1930, ch 859, §§ 1-3, L 1932, ch 627, §§ 1, 2, L 1934, ch 608, § 1, L 1934, ch 698, § 1, L 1937, ch 535, §§ 1, 2, L 1944, ch 363, § 1, eff March 29, 1944. Sub 4, amd, L 1947, ch 525, § 1, L 1947, ch 878, § 1, L 1982, ch 925, § 1, eff March 20, 1983. Sub 5, amd, L 1959, ch 696, § 4, L 1961, ch 764, § 1, eff Sept 1, 1961. Sub 5-a, add, L 1959, ch 696, § 3, eff Sept 1, 1959. Sub 7, amd, L 1992, ch 662, § 1, eff Aug 30, 1992 (see 1992 note below). Sub 12, amd, L 1947, ch 525, § 1, eff April 1, 1947.

NOTES:

Editor's Notes

Laws 1992, ch 662, § 2, eff Aug 30, 1992, provides as follows: § 2. This act shall take effect on the thirtieth day after it shall have become a law and shall not apply to improvements commenced before such date or to improvements for which an industrial development agency has committed to finance through the issuance of its bonds or the passage of its inducement or bond resolution before such effective date.

Revision Notes [1959 ch 696] The amendment of subdivision 5 of § 2 enlarged the class of beneficiaries of a trust of which an owner of an improvement of real property is a trustee under provisions of the Lien Law transferred by this act to Article 3-A of the Lien Law. With respect to benefits and wage supplements see new subdivision 5-a of § 2, added by § 3 of this act and see Labor Law, § 220(5)(b) and Penal Law, § 962-a. Subdivision 5-a is new. See Labor Law, § 220(5)(b) and Penal Law, § 962-a. See also the amendment of subdivision 5 of § 2 of the Lien Law by § 4 of this act and subdivision 2(d) of new § 71 of the Lien Law added by this act.

New York References: This section referred to in § 13; CLS Real P § 281; CLS Tax §§ 10, 253-b, 1132 Liens under contracts for public improvements, § 5 Preference over contractors, § 56 Personal property defined generally, CLS Gen Const § 39 Exhibit D: NYCLS Lien § 9 Page 1

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 9 (2014)

§ 9. Contents of notice of lien

The notice of lien shall state:

1. The name and residence of the lienor; and if the lienor is a partnership or a corporation, the business address of such firm, or corporation, the names of partners and principal place of business, and if a foreign corporation, its principal place of business within the state.

1-a. The name and address of the lienor's attorney, if any.

2. The name of the owner of the real property against whose interest therein a lien is claimed, and the interest of the owner as far as known to the lienor.

3. The name of the person by whom the lienor was employed, or to whom he furnished or is to furnish materials; or, if the lienor is a contractor or subcontractor, the person with whom the contract was made.

4. The labor performed or materials furnished and the agreed price or value thereof, or materials actually manufactured for but not delivered to the real property and the agreed price or value thereof.

5. The amount unpaid to the lienor for such labor or materials.

6. The time when the first and last items of work were performed and materials were furnished.

7. The property subject to the lien, with a description thereof sufficient for identification; and if in a city or village, its location by street and number, if known. A failure to state the name of the true owner or contractor, or a misdescription of the true owner, shall not affect the validity of the lien. The notice must be verified by the lienor or his agent, to the effect that the statements therein contained are true to his knowledge except as to the matters therein stated to be alleged on information and belief, and that as to those matters he believes it to be true. Exhibit E: NYCLS Lien § 10 Page 1

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 10 (2014)

§ 10. Filing of notice of lien

1. Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished; provided, however, that where the improvement is related to real property improved or to be improved with a single family dwelling, the notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished; and provided further where the notice of lien is for retainage, the notice of lien may be filed within ninety days after the date the retainage was due to be released; except that in the case of a lien by a real estate broker, the notice of lien may be filed only after the performance of the brokerage services and execution of lease by both lessor and lessee and only if a copy of the alleged written agreement of employment or compensation is annexed to the notice of lien, provided that where the payment pursuant to the written agreement of employment or compensation is to be made in installments, then a notice of lien may be filed within eight months after the final payment is due, but in no event later than a date five years after the first payment was made. For purposes of this section, the term "single family dwelling" shall not include a dwelling unit which is a part of a subdivision that has been filed with a municipality in which the subdivision is located when at the time the lien is filed, such property in the subdivision is owned by the developer for purposes other than his personal residence. For purposes of this section, "developer" shall mean and include any private individual, partnership, trust or corporation which improves two or more parcels of real property with single family dwellings pursuant to a common scheme or plan. The notice of lien must be filed in the clerk's office of the county where the property is situated. If such property is situated in two or more counties, the notice of lien shall be filed in the office of the clerk of each of such counties. The county clerk of each county shall provide and keep a book to be called the "lien docket," which shall be suitably ruled in columns headed "owners," "lienors," "lienor's attorney," "property," "amount," "time of filing," "proceedings had," in each of which he shall enter the particulars of the notice, properly belonging therein. The date, hour and minute of the filing of each notice of lien shall be entered in the proper column. Except where the county clerk maintains a block index, the names of the owners shall be arranged in such book in alphabetical order. The validity of the lien and the right to file a notice Page 2 NY CLS Lien § 10

thereof shall not be affected by the death of the owner before notice of the lien is filed.

2. Where the county clerk indexes liens in a block index, every notice of lien presented to the clerk of a county of filing, in order to entitle the same to be filed, shall contain in the body thereof, or shall have endorsed thereon, a designation of the number of every block, on the land map of the county, which is affected by the notice of lien. The county clerk shall cause such notice of lien to be entered in the block index suitably ruled to contain the columns listed in the preceding paragraph, under the block number of every block so designated. In cases where a notice of lien shall have been filed without such designation or with an erroneous designation, the county clerk, on presentation of proper proof thereof, shall enter such instrument in the proper index, under the proper block number of every block in which the land affected is situated, and shall, at the same time, make a note of such entry and of the date thereof in every place in which such instrument may have been erroneously indexed, opposite the entry thereof, and also upon the instrument itself, if the same be in his possession or produced to him for the purpose, and the filing of such instrument shall be constructive notice as to property in the block not duly designated at the time of such filing only from the time when the same shall be properly indexed.

A county clerk may adopt a new indexing system utilizing electro-mechanical, electronic or any other method he deems suitable for maintaining the indexes.

HISTORY: Add, L 1909, ch 38; amd, L 1916, ch 507, § 5, L 1929, ch 515, § 2, L 1956, ch 793, § 3, L 1966, ch 42, § 2, L 1982, ch 477, § 1, L 1982, ch 925, § 2, eff March 20, 1983, L 1988, ch 335, § 1 L 1991, ch 648, § 6, eff July 26, 1991, L 1994, ch 360, § 1, L 2000, ch 288, § 1, eff Oct 22, 2000, L 2011, ch 367, § 1, eff Aug 3, 2011.

NOTES:

Practice Insights:

INHERENT DIFFICULTY OF KNOWING WHEN AND HOW OFTEN TO FILE NOTICE OF MECH- ANICS' LIEN By Brook Boyd, Esq., New York, NY General Editor, Alfred C. Tartaglia, Esq., New York, NY

INSIGHT A mechanics' lien will not be valid unless it complies with the technical requirements in the Lien Law, but owners will generally wait to attack a notice of lien until after the filing deadline has passed, when it is too late for the contractor to re-file a corrected notice of lien. Moreover, a mechanics' lien filed against an entire condominium, its common elements, or both, is also generally void, even if the contractor has been properly hired by the condominium association. However, generally a contractor cannot waive its right to file a mechanics' lien in advance of performing its work, and so the current practice is for contractors to give only partial waivers, usually on a monthly basis, covering the work actually performed to the extent paid. Finally, a contractor has a difficult choice in deciding when to file a mechanics' lien, since the contractor naturally tends to wait until its work is complete to file a lien, but this delay may prejudice its rights

ANALYSIS

Procedure for filing notice of mechanics' lien not difficult. Exhibit F: NYCLS Lien § 11 Page 1

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 11 (2014)

§ 11. Service of copy of notice of lien

Within five days before or thirty days after filing the notice of lien, the lienor shall serve a copy of such notice upon the owner, if a natural person, (a) by delivering the same to him personally, or if the owner cannot be found, to his agent or attorney, or (b) by leaving it at his last known place of residence in the city or town in which the real property or some part thereof is situated, with a person of suitable age and discretion, or (c) by registered or certified mail addressed to his last known place of residence, or (d) if such owner has no such residence in such city or town, or cannot be found, and he has no agent or attorney, by affixing a copy thereof conspicuously on such property, between the hours of nine o'clock in the forenoon and four o'clock in the afternoon; if the owner be a corporation, said service shall be made (i) by delivering such copy to and leaving the same with the president, vice-president, secretary or clerk to the corporation, the cashier, treasurer or a director or managing agent thereof, personally, within the state, or (ii) if such officer cannot be found within the state by affixing a copy thereof conspicuously on such property between the hours of nine o'clock in the forenoon and four o'clock in the afternoon, or (iii) by registered or certified mail addressed to its last known place of business. Failure to file proof of such a service with the county clerk within thirty-five days after the notice of lien is filed shall terminate the notice as a lien. Until service of the notice has been made, as above provided, an owner, without knowledge of the lien, shall be protected in any payment made in good faith to any contractor or other person claiming a lien.

HISTORY: Add, L 1909, ch 38; amd, L 1913, ch 88, § 1, L 1929, ch 515, § 2, L 1982, ch 7, § 1, L 1988, ch 105, § 1, L 1991, ch 276, § 1, L 1996, ch 147, § 1, eff July 11, 1996 (see 1996 note below).

NOTES:

Editor's Notes Exhibit G: NYCLS Lien § 13 Page 1

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 13 (2014)

§ 13. Priority of liens

(1) A lien for materials furnished or labor performed in the improvement of real property shall have priority over a conveyance, mortgage, judgment or other claim against such property not recorded, docketed or filed at the time of the filing of the notice of such lien, except as hereinafter in this chapter provided; over advances made upon any mortgage or other encumbrance thereon after such filing, except as hereinafter in this article provided; and over the claim of a creditor who has not furnished materials or performed labor upon such property, if such property has been assigned by the owner by a general assignment for the benefit of creditors, within thirty days before the filing of either of such notices; and also over an attachment hereafter issued or a money judgment hereafter recovered upon a claim, which, in whole or in part, was not for materials furnished, labor performed or moneys advanced for the improvement of such real property; and over any claim or lien acquired in any proceedings upon such judgment. Such liens shall also have priority over advances made upon a contract by an owner for an improvement of real property which contains an option to the contractor, his successor or assigns to purchase the property, if such advances were made after the time when the labor began or the first item of material was furnished, as stated in the notice of lien. If several buildings are demolished, erected, altered or repaired, or several pieces or parcels of real property are improved, under one contract, and there are conflicting liens thereon, each lienor shall have priority upon the particular part of the real property or upon the particular building or premises where his labor is performed or his materials are used. Persons shall have no priority on account of the time of filing their respective notices of liens, but all liens shall be on a parity except as hereinafter in section fifty-six of this chapter provided; and except that in all cases laborers for daily or weekly wages shall have preference over all other claimants under this article.

(1-a) Parties having assignments of moneys due or to become due under a contract for the improvement of real property, unless such assignments be set aside as diversions of trust assets as provided in article three-a of this chapter, shall have priority as follows:

An assignee of moneys or any part thereof, due or to become due under a contract for the improvement of real property, whose assignment is duly filed prior to the filing of a notice of lien or assignment of every other party to the Page 2 NY CLS Lien § 13

action, shall have priority over those parties to the extent of moneys advanced upon such assignment before the filing of the notice of lien or assignment next subsequent to his assignment, but as to moneys advanced subsequent to a notice of lien or assignment filed and unsatisfied or not discharged such assignee for the purpose of determining his proportionate share of moneys available for distribution as provided in subdivision one of this section shall be treated as a lienor having a lien to the extent of moneys so advanced.

An assignee of moneys or any part thereof, due or to become due under a contract for an improvement of real property whose assignment is duly filed subsequent to the filing of the notice of lien or assignment of any other party shall for the purpose of determining his proportionate share of moneys available for distribution, as provided in subdivision one of this section be treated as a lienor having a lien to the extent of moneys actually advanced upon such assignment prior to the filing thereof.

(2) When a building loan mortgage is delivered and recorded a lien shall have priority over advances made on the building loan mortgage after the filing of the notice of lien; but such building loan mortgage, whenever recorded, to the extent of advances made before the filing of such notice of lien, shall have priority over the lien, provided it or the building loan contract contains the covenant required by subdivision three hereof, and provided the building loan contract is filed as required by section twenty-two of this chapter. Every mortgage recorded subsequent to the commencement of the improvement and before the expiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the improvement shall, to the extent of advances made before the filing of a notice of lien, have priority over liens thereafter filed if it contains the covenant required by subdivision three hereof. The lien of a vendee under an executory contract for the sale of land and the improvement thereof by the construction of a building thereon shall, to the extent of amounts paid thereunder to the vendor before the filing of a notice of lien, have priority over liens filed after the contract or memorandum thereof is recorded as provided in section two hundred ninety-four of the real property law if the recorded contract or memorandum specifies the total amount of payments made by the vendee or required by the contract to be made by the vendee before conveyance of title.

(3) Every such building loan mortgage and every mortgage recorded subsequent to the commencement of the improvement and before the expiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the improvement shall contain a covenant by the mortgagor that he will receive the advances secured thereby and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement, and that he will apply the same first to the payment of the cost of improvement before using any part of the total of the same for any other purpose, provided, however, that if the party executing the building loan contract is not the owner of the fee but is the party to whom such advances are to be made, a building loan contract executed and filed pursuant to section twenty-two of this chapter shall contain the said covenant by such party executing such building loan contract, in place of the covenant by the mortgagor in the building loan mortgage as hereinbefore provided. Nothing in this subdivision shall be considered as imposing upon the lender any obligation to see to the proper application of such advances by the owner; and nothing in this section, nor in that portion of section two of this chapter, defining "cost of improvement" shall be deemed to impair or subordinate the lien of any mortgage containing the covenant required by this subdivision. To the extent that the trust res consists of the right to receive advances as distinct from advances actually received, breach of the trust shall give rise to a civil action only. The covenant provided for herein shall be deemed to have been made and to be in full force and effect if, in lieu of the foregoing provisions, a statement in substantially the following form is contained in the mortgage or contract, "subject to the trust fund provisions of section thirteen of the lien law."

(4) Nothing in subdivision two or three of this section shall apply to any mortgage given by a purchaser for value from an owner making the improvement and recorded prior to the filing of a lien pursuant to this chapter, provided the instrument of conveyance contains the provisions mentioned in subdivision five herein.

(5) No instrument of conveyance recorded subsequent to the commencement of the improvement, and before the expiration of the period specified in section ten of this chapter for filing of notice of lien after the completion of the Page 3 NY CLS Lien § 13

improvement, shall be valid as against liens filed within a corresponding period of time measured from the recording of such conveyance, unless the instrument contains a covenant by the grantor that he will receive the consideration for such conveyance and will hold the right to receive such consideration as a trust fund to be applied first for the purpose of paying the cost of the improvement and that he will apply the same first to the payment of the cost of the improvement before using any part of the total of the same for any other purpose. Nothing in this subdivision shall be construed as imposing upon the grantee any obligation to see to the proper application of such consideration by the grantor. Nothing in this subdivision shall apply to a deed given by a referee or other person appointed by the court for the sole purpose of selling real property. Nothing in this subdivision shall apply to the consideration received by a grantor who, pursuant to a written agreement entered into and duly recorded prior to the commencement of the improvement, conveys to the person making such improvement, the land upon which such improvement is made. However, such a conveyance shall be subject to liens filed prior thereto, as provided by this chapter. To the extent that the trust res consists of the right to receive the consideration for such conveyance as distinct from the consideration actually received, breach of the trust shall give rise to a civil action only. The covenant provided for herein shall be deemed to have been made and to be in full force and effect if, in lieu of the foregoing provisions, a statement in substantially the following form is contained in the instrument of conveyance, "subject to the trust fund provisions of section thirteen of the lien law."

Except that this section shall not apply to any mortgage taken by the home owners' loan corporation, a corporation created under an act of congress, known as the "home owners' loan act of nineteen hundred thirty-three," and the "home owners' loan act of nineteen hundred thirty-three as amended," and said mortgage shall have priority over any and all liens filed subsequent to the date of the recording of said mortgage whether or not the cash and/or bonds for which said mortgage has been taken as security, shall have been advanced at the time of the execution of such mortgage or subsequent thereto, and it shall not be necessary to execute and file any building loan contract or any other contract, in compliance with this section or any part thereof.

(6) Every assignment of moneys, or any part thereof, due or to become due under a contract for the improvement of real property shall contain a covenant by the assignor that he will receive any moneys advanced thereunder by the assignee and will hold the right to receive such moneys as trust funds to be first applied to the payment of trust claims as defined in section seventy-one of the lien law, and that he will apply the same to such payments only, before using any part of the moneys for any other purpose.

HISTORY: Add, L 1909, ch 38; amd, L 1916, ch 507, § 7, L 1929, ch 515, § 2, eff Oct 1, 1929. Sub (1), amd, L 1947, ch 878, § 4, eff Sept 1, 1947. Sub (1-a), add, L 1942, ch 808, § 13; amd, L 1959, ch 696, § 6, eff Sept 1, 1959. Sub (2), formerly sub 2, amd, L 1930, ch 859, § 7, L 1932, ch 627, § 5, L 1961, ch 956, § 3 (see 1961 note below); so designated sub (2) and amd, L 1991, ch 336, § 1, eff July 15, 1991. Sub (3), amd, L 1930, ch 859, § 7, L 1932, ch 627, § 5, L 1942, ch 808, § 3, L 1954, ch 672, § 1, L 1991, ch 336, § 1, eff July 15, 1991. Sub (4), add, L 1932, ch 627, § 6, eff July 1, 1932. Sub (5), add, L 1932, ch 627, § 5; amd, L 1933, ch 164, § 1, L 1942, ch 808, § 12, L 1954, ch 672, § 2, L 1991, ch 336, § 1, eff July 15, 1991. Sub (5), first undesignated par, amd, L 1991, ch 336, § 1, eff July 15, 1991. Sub (5), second undesignated par, add, L 1935, ch 922, § 2, eff May 15, 1935. Sub (6), add, L 1942, ch 808, § 9; amd, L 1959, ch 696, § 6, eff Sept 1, 1959. Sub (7), add, L 1942, ch 808, § 7; repealed, L 1959, ch 696, § 14, eff Sept 1, 1959.

NOTES:

Editor's Notes Exhibit H: Leonard Engineering, Inc. v. Zephhyr Petroleum Corporation 522 N.Y.S. 2d 900 Page 1

1 of 56 DOCUMENTS

Positive As of: Jun 18, 2014

Leonard Engineering, Inc., Appellant, v. Zephyr Petroleum Corporation et al., Defendants, and New York Paving, Inc., Respondent

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Appellate Division, Second Department

135 A.D.2d 795; 522 N.Y.S.2d 900; 1987 N.Y. App. Div. LEXIS 52730

December 28, 1987

CASE SUMMARY: In the engineering company's action to foreclose the lien, the trial court granted the paving company's motion to discharge the lien and dismiss the complaint. On appeal, PROCEDURAL POSTURE: Plaintiff lien holder, an the court affirmed the decision. The court held that the engineering company, challenged the decision of the misdescription of the premises with respect to an Supreme Court, Queens County (New York), which incorrect lot number resulted in a misfiling of the notice granted a motion pursuant to N.Y. Lien Law § 19(6) by that could not have been discovered in the course of a defendant transferee of the subject property, a paving standard title search, and, therefore, the notice of lien was company, discharging a notice of lien. The trial court void on its face and could not be amended. Further, as a granted the paving company's motion to dismiss the result of the trust fund provision in the deed, the paving complaint and denied the engineering company's cross company was protected from liability for the debt owed motion to amend the notice of lien. by the contracting customer.

OVERVIEW: The engineering company performed OUTCOME: The court affirmed the discharge of the services for the contracting customer on its property and lien and dismissal of the complaint against the paving a balance remained unpaid. The contracting customer company. The court also affirmed the denial of the then conveyed the premises to the paving company. In engineering company's cross motion to amend the notice the deed, the contracting customer covenanted that it of lien. would hold in trust amounts to pay improvement costs. Before the deed was recorded, the engineering company CORE TERMS: notice of lien, trust fund, conveyance, filed a notice of mechanic's lien against the property, deed, amend, mechanic's lien, nunc pro tunc, engineering, however, a rider misdescribed the property and the clerk recording, covenant, block, action to foreclose, right to filed the notice of lien under a different piece of property. receive, purpose of paying, lot number, instrument of Page 2 135 A.D.2d 795, *; 522 N.Y.S.2d 900, **; 1987 N.Y. App. Div. LEXIS 52730, *** conveyance, designed to protect, commencement, discharge the lien and dismiss the complaint is affirmed; designation, incorrect, recorded, grantor, notice, rider and it is further,

LexisNexis(R) Headnotes Ordered that the plaintiff's appeal from so much of the order as denied its cross motion to amend the notice of lien is dismissed as academic; and it is further,

Ordered that the respondent is awarded costs. Contracts Law > Types of Contracts > Covenants Real Property Law > Nonmortgage Liens > Mechanics' The plaintiff Leonard Engineering, Inc. (hereinafter Liens Leonard) entered into an agreement with the defendant [HN1] N.Y. Lien Law § 13(5) provides, in part, as Zephyr Petroleum Corporation (hereinafter Zephyr) to follows: No instrument of conveyance recorded provide engineering services at a premises known as subsequent to the commencement of the improvement, 37-28 Railroad Avenue, Long Island City, then [***2] and before the expiration of four months after the owned by Zephyr. The engineering services were completion thereof, shall be valid as against liens filed allegedly performed with respect to the subject property within four months from the recording of such between March 20, 1985 and December 19, 1985, and conveyance, unless the instrument contains a covenant by Leonard contends that a balance of $ 26,500 is unpaid. the grantor that he will receive the consideration for such conveyance and will hold the right to receive such The defendant Zephyr conveyed the subject premises consideration as a trust fund to be applied first for the to defendant New York Paving, Inc. (hereinafter New purpose of paying the cost of the improvement and that York Paving) in a transaction wherein the contract and he will apply the same first to the payment of the cost of title closings took place simultaneously on December 16, the improvement before using any part of the total of the 1985. Significantly, the deed given by Zephyr to New same for any other purpose. Nothing in this subdivision York Paving contains the following provision: "and the shall be construed as imposing upon the grantee any party of the first part [*796] [Zephyr] in compliance obligation to see to the proper application of such with Section 13 of the Lien Law, covenants that the party consideration by the grantor. The covenant provided for of the first part will receive the consideration for this herein shall be deemed to have been made and to be in conveyance and will hold the right to receive such full force and effect if, in lieu of the foregoing provisions, consideration as a trust fund to be applied first for the a statement in substantially the following form is purpose of paying the cost of the improvement and will contained in the instrument of conveyance, subject to the apply the same first to the payment of the cost of the trust fund provisions of § 13 of the lien law. improvement [**902] before using any part of the total of the same for any other purpose". JUDGES: [***1] Mangano, J. P., Niehoff, Kooper, Spatt and Harwood, JJ., concur. No notice of lien had been filed by the plaintiff on the date of the conveyance of title to New York Paving. OPINION The deed to New York Paving was not recorded until February 4, [***3] 1986. In the interim, on December [*795] [**901] In an action to foreclose a 30, 1985, the plaintiff filed a notice of mechanic's lien mechanic's lien, the plaintiff appeals from an order of the against the premises in the office of the County Clerk, Supreme Court, Queens County (Joy, J.), dated October Queens County. The notice of lien on its face contained 22, 1986, which (1) granted the motion of the defendant the correct street address. Attached was a rider New York Paving, Inc. for an order pursuant to Lien Law containing the correct metes and bounds description of § 19 (6) discharging the notice of lien and, pursuant to the premises. However, the rider misdescribed the CPLR 3211 (a) (7), dismissing the complaint, and (2) property as block 312, lot 250 instead of its correct denied its cross motion pursuant to Lien Law § 12-a to designation, block 312, lot 2. By reason of this incorrect amend the notice of lien nunc pro tunc. designation, the County Clerk, Queens County, which files liens according to block and lot number, filed the Ordered that so much of the order as granted the notice of lien under a different piece of property. motion of the defendant New York Paving, Inc. to Page 3 135 A.D.2d 795, *796; 522 N.Y.S.2d 900, **902; 1987 N.Y. App. Div. LEXIS 52730, ***3

Following the commencement of the plaintiff's action to of the same for any other purpose. Nothing in this foreclose upon the lien, the defendant New York Paving subdivision shall be construed as imposing upon the moved to (1) discharge the lien (see, Lien Law § 19 [6]), grantee any obligation to see to the proper application of and (2) dismiss the complaint (see, CPLR 3211 [a] [7]), such consideration by the grantor * * * The covenant and the plaintiff then cross-moved to amend the notice of provided for herein shall be deemed to have been made lien nunc pro tunc to correct the erroneous lot number and to be in full force and effect if, in lieu of the (see, Lien Law § 12-a). The Supreme Court, Queens foregoing provisions, a statement in substantially the County, granted the motion of the defendant New York following form is contained in the instrument of Paving and denied the plaintiff's cross motion, holding, in conveyance, 'subject to the trust fund provisions of effect, that the misdescription of the premises [***4] section thirteen of the lien law'" (emphasis supplied). with respect to an incorrect lot number resulted in a misfiling of the notice that could not have been While the Lien Law is generally designed to protect discovered in the course of a standard title search, and, contractors, material providers and other classes of therefore, the notice of lien was void on its face and could workers who supply labor or furnish materials (see, Lien not be amended. Law § 2), subdivision (5) of section 13 is an exception which is specifically designed to protect purchasers of We sustain the holding that the plaintiff's notice of realty (see, 37 NY Jur, Mechanics' Liens, § 148). We lien was ineffective as against the defendant New York find that the trust fund provision in the New York Paving Paving for different reasons than those stated by the deed complies with the statutory requirements. Although Supreme Court. As a result of the provisions of Lien the statute refers to "liens filed within four months from Law § 13 (5) and the trust fund provision in the deed the recording", in order to further [***6] the underlying from Zephyr to New York Paving, New York Paving is purpose of Lien Law § 13 (5), this language must be protected from liability for the debt owed by Zephyr. construed to include liens filed prior to recording of a conveyance when the conveyance occurred prior to the [HN1] Lien Law § 13 (5) provides, in relevant part, filing of the lien. Since the deed to New York Paving as follows: "No instrument of conveyance recorded contained the statutory trust fund provision, the plaintiff's subsequent to the commencement [*797] of the lien is not [**903] valid against the deed conveying the improvement, and before the expiration of four months property to New York Paving. Accordingly, the after the completion thereof, shall be valid as against plaintiff's recourse, if any, does not lie against New York liens filed within four months from the recording of such Paving. conveyance, unless the instrument contains a covenant by the grantor that he will receive the consideration for such The discharge of the lien and dismissal of the conveyance and will hold the right to receive such complaint as against New York Paving render academic consideration as a trust fund to be applied first for the the plaintiff's appeal from so much of the order as denied purpose of paying the cost of the improvement [***5] its cross motion to amend the notice of lien nunc pro and that he will apply the same first to the payment of the tunc. cost of the improvement before using any part of the total Exhibit I:Monroe Saving Bank v. First Nat’l Bank 50 App. Div. 2d 314, 377 NYS2d 827

Exhibit J: NYCLS Lien § 17 Page 1

1 of 52 DOCUMENTS

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 17 (2014)

§ 17. Duration of lien

No lien specified in this article shall be a lien for a longer period than one year after the notice of lien has been filed, unless within that time an action is commenced to foreclose the lien, and a notice of the pendency of such action, whether in a court of record or in a court not of record, is filed with the county clerk of the county in which the notice of lien is filed, containing the names of the parties to the action, the object of the action, a brief description of the real property affected thereby, and the time of filing the notice of lien; or unless an extension to such lien, except for a lien on real property improved or to be improved with a single family dwelling, is filed with the county clerk of the county in which the notice of lien is filed within one year from the filing of the original notice of lien, continuing such lien and such lien shall be redocketed as of the date of filing such extension. Such extension shall contain the names of the lienor and the owner of the real property against whose interest therein such lien is claimed, a brief description of the real property affected by such lien, the amount of such lien, and the date of filing the notice of lien. No lien shall be continued by such extension for more than one year from the filing thereof. In the event an action is not commenced to foreclose the lien within such extended period, such lien shall be extinguished unless an order be granted by a court of record or a judge or justice thereof, continuing such lien, and such lien shall be redocketed as of the date of granting such order and a statement made that such lien is continued by virtue of such order. A lien on real property improved or to be improved with a single family dwelling may only be extended by an order of a court of record, or a judge or justice thereof. No lien shall be continued by court order for more than one year from the granting thereof, but a new order and entry may be made in each of two successive years. If a lienor is made a party defendant in an action to enforce another lien, and the plaintiff or such defendant has filed a notice of the pendency of the action within the time prescribed in this section, the lien of such defendant is thereby continued. Such action shall be deemed an action to enforce the lien of such defendant lienor. The failure to file a notice of pendency of action shall not abate the action as to any person liable for the payment of the debt specified in the notice of lien, and the action may be prosecuted to judgment against such person. The provisions of this section in regard to continuing liens shall apply to liens discharged by deposit or by order on the filing of an undertaking. Where a lien is discharged by deposit or by order, a notice of pendency of action shall not be filed. Page 2 NY CLS Lien § 17

A lien, the duration of which has been extended by the filing of a notice of the pendency of an action as above provided, shall nevertheless terminate as a lien after such notice has been canceled as provided in section sixty-five hundred fourteen of the civil practice law and rules or has ceased to be effective as constructive notice as provided in section sixty-five hundred thirteen of the civil practice law and rules.

HISTORY: Add, L 1909, ch 38; amd, L 1916, ch 507, § 9, L 1929, ch 515, § 2, 1989, ch 691, § 1 (see 1989 note below), L 1990, ch 405, § 1, L 2000, ch 324, § 1, eff Jan 1, 2001. Opening par, amd, L 2000, ch 324, § 1, eff Jan 1, 2001. Concluding par, add L 1957, ch 877, § 5; amd, L 1958, ch 116, § 2, L 1970, ch 696, § 1, eff May 12, 1970.

NOTES:

Editor's Notes

Laws 1989, ch 691, § 3, eff Aug 21, 1989, provides as follows: § 3. This act shall take effect on the thirtieth day after it shall have become a law and shall apply to all existing mechanic's liens and public improvement liens currently filed and all those filed hereafter.

Revision Notes [1957, ch 877]. This act was recommended by the Judicial Conference and a supporting study for the proposed changes in the Civil Practice Act is in the Second Annual Report of the Judicial Conference (1956), pages 106-120, 126-127. The amendments of sections 17 and 19 of the Lien Law were to incorporate the amendment to section 123 of the Civil Practice Act and to have these sections of Lien Law conform to the Civil Practice Act. A companion bill was submitted dealing with the amendment of section one hundred twenty-four and the creation of section one hundred twenty-four-a of the Civil Practice Act. The reason for the two separate bills was that the Law Revision Commission had submitted a bill dealing with the same subject matter (Senate Int. No. 263, Assembly Int. 362) as contained in the companion bill recommended by the Judicial Conference. [1958, ch 116] This act was recommended by the Judicial Conference. Chapter 877 of the Laws of 1957 was enacted at the recommendation of the Judicial Conference, and the purpose of the 1958 legislation was to correct and clarify certain of those sections passed by the Legislature the previous year.

Practice Insights:

DURATION OF MECHANICS' LIENS By Brook Boyd, Esq., New York, NY General Editor, Alfred C. Tartaglia, Esq., New York, NY

INSIGHT Mechanics' liens are inherently temporary, and generally expire within one year unless affirmative action is taken to extend, continue, or enforce them. Therefore, a viable defensive strategy for an owner, who can afford to wait, is to do nothing and wait for the lien to expire Exhibit K: NYCLS Real P § 339 –I

Exhibit L: NYCLS Lien § 19 Page 1

28 of 88 DOCUMENTS

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 19 (2014)

§ 19. Discharge of lien for private improvement

A lien other than a lien for labor performed or materials furnished for a public improvement specified in this article, may be discharged as follows:

(1) By the certificate of the lienor, duly acknowledged or proved and filed in the office where the notice of lien is filed, stating that the lien is satisfied or released as to the whole or a portion of the real property affected thereby and may be discharged in whole or in part, specifying the part. Upon filing such certificate, the county clerk in the office where the same is filed, shall note the fact of such filing in the "lien docket" in the column headed "Proceedings had" opposite the docket of such lien.

(2) By failure to begin an action to foreclose such lien or to secure an order continuing it, within one year from the time of filing the notice of lien, unless an action be begun within the same period to foreclose a mortgage or another mechanic's lien upon the same property or any part thereof and a notice of pendency of such action is filed according to law, but a lien, the duration of which has been extended by the filing of a notice of the pendency of an action as herein provided, shall nevertheless terminate as a lien after such notice has been cancelled or has ceased to be effective as constructive notice.

(3) By order of the court vacating or cancelling such lien of record, for neglect of the lienor to prosecute the same, granted pursuant to section fifty-nine of this chapter.

(4) Either before or after the beginning of an action by the owner or contractor executing a bond or undertaking in an amount equal to one hundred ten percent of such lien conditioned for the payment of any judgment which may be rendered against the property for the enforcement of the lien: a. The execution of any such bond or undertaking by any fidelity or surety company authorized by the laws of this state to transact business, shall be sufficient; and where a certificate of qualification has been issued by the [fig 1] superintendent of ifinancial services under the provisions of section one thousand one hundred eleven of the insurance law, and has not been revoked, no justification or notice thereof shall be necessary. Any such company may execute any Page 2 NY CLS Lien § 19

such bond or undertaking as surety by the hand of its officers, or attorney, duly authorized thereto by resolution of its board of directors, a certified copy of which resolution, under the seal of said company, shall be filed with each bond or undertaking. Any such bond or undertaking shall be filed with the clerk of the county in which the notice of lien is filed, and a copy shall be served upon the adverse party. The undertaking is effective when so served and filed. If a certificate of qualification issued pursuant to subsections (b), (c) and (d) of section one thousand one hundred eleven of the insurance law is not filed with the undertaking, a party may except, to the sufficiency of a surety and by a written notice of exception served upon the adverse party within ten days after receipt, a copy of the undertaking. Exceptions deemed by the court to have been taken unnecessarily, or for vexation or delay, may, upon notice, be set aside, with costs. Where no exception to sureties is taken within ten days or where exceptions taken are set aside, the undertaking shall be allowed. b. In the case of bonds or undertakings not executed pursuant to paragraph a of this subdivision, the owner or contractor shall execute an undertaking with two or more sufficient sureties, who shall be free holders, to the clerk of the county where the premises are situated. The sureties must together justify in at least double the sum named in the undertaking. A copy of the undertaking, with notice that the sureties will justify before the court, or a judge or justice thereof, at the time and place therein mentioned, must be served upon the lienor or his attorney, not less than five days before such time. Upon the approval of the undertaking by the court, judge or justice an order shall be made by such court, judge or justice discharging such lien. c. If the lienor cannot be found, or does not appear by attorney, service under this subsection may be made by leaving a copy of such undertaking and notice at the lienor's place of residence, or if a corporation at its principal place of business within the state as stated in the notice of lien, with a person of suitable age and discretion therein, or if the house of his abode or its place of business is not stated in said notice of lien and is not known, then in such manner as the court may direct. The premises, if any, described in the notice of lien as the lienor's residence or place of business shall be deemed to be his said residence or its place of business for the purposes of said service at the time thereof, unless it is shown affirmatively that the person servicing the papers or directing the service had knowledge to the contrary. Notwithstanding the other provisions of this subdivision relating to service of notice, in any case where the mailing address of the lienor is outside the state such service may be made by registered or certified mail, return receipt requested, to such lienor at the mailing address contained in the notice of lien. d. Except as otherwise provided in this subdivision, the provisions of article twenty-five of the civil practice law and rules regulating undertakings is applicable to a bond or undertaking given for the discharge of a lien on account of private improvements.

(5) Upon filing in the office of the clerk of the county where the property is situated, a transcript of a judgment of a court of competent jurisdiction, together with due proof of service of due notice of entry thereof, showing a final determination of the action in favor of the owner of the property against which the lien was claimed.

(6) Where it appears from the face of the notice of lien that the claimant has no valid lien by reason of the character of the labor or materials furnished and for which a lien is claimed, or where for any other reason the notice of lien is invalid by reason of failure to comply with the provisions of section nine of this article, or where it appears from the public records that such notice has not been filed in accordance with the provisions of section ten of this article, the owner or any other party in interest, may apply to the supreme court of this state, or to any justice thereof, or to the county judge of the county in which the notice of lien is filed, for an order summarily discharging of record the alleged lien. A copy of the papers upon which application will be made together with a notice setting forth the court or the justice thereof or the judge to whom the application will be made at a time and place therein mentioned must be served upon the lienor not less than five days before such time. If the lienor can not be found, such service may be made as the court, justice or judge may direct. The application must be made upon a verified petition accompanied by other written proof showing a proper case therefor, and upon the approval of the application by the court, justice or judge, an order shall be made discharging the alleged lien of record.

HISTORY: Add, L 1909, ch 38; amd, L 1909, ch 240, § 53, L 1909, ch 427, § 1, L 1916, ch 507, § 11 L 1920, ch 373, § 1, April Exhibit M:NYCLS Lien § 59

Exhibit N:NYCLS Lien § 20

Exhibit O: NYCLS Lien § 4 Page 1

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LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 4 (2014)

§ 4. Extent of lien

(1) Such lien shall extend to the owner's right, title or interest in the real property and improvements, existing at the time of filing the notice of lien, or thereafter acquired, except as hereinafter in this article provided. If an owner assigns his interest in such real property by a general assignment for the benefit of creditors, within thirty days prior to such filing, the lien shall extend to the interest thus assigned. If any part of the real property subjected to such lien be removed by the owner or by any other person, at any time before the discharge thereof, such removal shall not affect the rights of the lienor, either in respect to the remaining real property, or the part so removed. If labor is performed for, or materials furnished to, a contractor or subcontractor for an improvement, the lien shall not be for a sum greater than the sum earned and unpaid on the contract at the time of filing the notice of lien, and any sum subsequently earned thereon. In no case shall the owner be liable to pay by reason of all liens created pursuant to this article a sum greater than the value or agreed price of the labor and materials remaining unpaid, at the time of filing notices of such liens, except as hereinafter provided.

(2) Such lien shall not extend to the owner's right, title or interest in real property and improvements, existing at the time of filing the notice of lien if such lien arises from the failure of a lessee of the right to explore, develop or produce natural gas or oil, to pay for, compensate or render value for improvements made with the consent or at the request of such lessee by a contractor, subcontractor, materialman, equipment operator or owner, landscaper, nurseryman, or person or corporation who performs labor or furnishes materials for the exploration, development, or production of oil or natural gas or otherwise improves such leased property. Such lien shall extend to the improvements made for the exploration, development and production of oil and natural gas, and the working interest held by a lessee of the right to explore, develop or produce oil and natural gas.

(3) Notwithstanding subdivision two if a property owner is also a developer of oil and gas resources and is a party to an agreement with a person or firm authorized to perfect a lien arising out of the failure of such developer to compensate or render value for improvements to the property upon which an oil or gas well is drilled or established, the lien shall extend to the owners' right or interest in such real property. Page 2 NY CLS Lien § 4

HISTORY: Add, L 1909, ch 38; amd, L 1916, ch 507, § 2, L 1929, ch 519, § 2, L 1930, ch 859, § 5, eff Oct 1, 1930. Sub (2), add, L 1985, ch 704, § 2, eff Aug 1, 1985 (see 1985 note below). Sub (3), add, L 1985, ch 704, § 2, eff Aug 1, 1985 (see 1985 note below).

NOTES:

Practice Insights:

MECHANICS' LIENS HAVE BROAD SCOPE By Brook Boyd, Esq., New York, NY General Editor, Alfred C. Tartaglia, Esq., New York, NY

INSIGHT A mechanics' lien is a cheap remedy that can be filed unilaterally not only by construction contractors and subcontractors, but also by certain architects, leasing brokers, and manufacturers, which are seeking payment for work performed for, or supplies delivered to, real estate. Each of these parties, simply by filing a mechanics' lien, can interfere with a proposed sale or refinancing, or trigger a default under a mortgage, lease, or construction contract. Moreover, because of the trust fund provisions of the Lien Law, and the Lien Law covenants included in deeds and mortgages, a mechanics' lien can attach to the proceeds of sale of real estate as well as mortgage loan proceeds and payments due under a construction contract. Therefore, a search should generally be made for mechanics' lien filings before any deed or mortgage is delivered, or any purchase payment or loan advance is made relating thereto

ANALYSIS

Contractors, architects, brokers, and suppliers can file mechanics' liens.

A contractor, subcontractor, architect, broker (procuring commercial lease of more than three years) or supplier, can file a mechanics' lien on account of any "improvement" (defined to include "demolition, erection, alteration or repair" to real property, architectural plans, and above brokerage services) with the owner's consent. However, a supplier to a supplier cannot file a mechanics' lien. Lien Law §§ 2(4), 3.

Tenant's contractor has right to file mechanics' lien against owner's property if improvements were made with consent of owner.

A tenant's contractor is not entitled to file a mechanics' lien against the owner's interest in the real estate leased by the tenant unless the improvements are made by such contractor "with the consent or at the request of the owner." Lien Law §§ 3, 4(2). Courts have stated that this consent requires an affirmative act by the owner, and the owner's mere acquiescence is not enough to allow the tenant's contractors to file mechanics' liens against the owner's interest. Also, the owner is not deemed to consent to such improvements merely because the owner delivers consent to the tenant to confirm that the tenant's improvements do not violate any restrictions in its lease on alterations without the owner's consent. Tri-North Builders Inc. v. Di Donna, 217 A.D.2d 886, 629 N.Y.S.2d 850 (1995).

Lien Law claims affect real estate and proceeds.

Sales proceeds received by a seller of real estate, mortgage loan proceeds received by a borrower/mortgagor, and payments received by contractors and subcontractors under construction contracts, are generally deemed trust funds for Exhibit P: Robert P. Frink v. Dudley Bierau et al 212 N.Y.S. 2d 869 Page 1

1 of 51 DOCUMENTS

Robert P. Frink, Doing Business under the Name of Pulver Gas and Oil Company, Plaintiff, v. Dudley Bierau et al., Defendants

[NO NUMBER IN ORIGINAL]

County Court of New York, Columbia County

27 Misc. 2d 701; 212 N.Y.S.2d 869; 1961 N.Y. Misc. LEXIS 3137

March 30, 1961

DISPOSITION: [***1] The motion for summary The subcontractor's rights were extinguished when the judgment is granted. general contractor was paid in full.

CASE SUMMARY: OUTCOME: The court granted the property owners' motion for summary judgment in the subcontractor's action to foreclose his mechanic's lien. PROCEDURAL POSTURE: Plaintiff subcontractor brought an action to foreclose his mechanic's liens CORE TERMS: general contractor, notice of lien, against defendant property owners. The property owners summary judgment, discharging, unenforcible, litigated, moved for summary judgment. attach, lienor, mechanic's lien, time of filing, question of fact, separate action, subcontractor, guarantor, notice, OVERVIEW: The property owners contracted with a installation, dwelling, heating general contractor to build a dwelling on land purchased from the general contractor. The subcontractor had done LexisNexis(R) Headnotes other heating installations for the general contractor and those contracts were in default when the subcontractor was engaged to install the heating equipment for the property owners. The subcontractor knew that the contractor was in serious financial difficulty. The Contracts Law > Secured Transactions > Perfection & subcontractor refused to complete its installation, but Priority > Priority > Liens > Mechanics' Liens agreed to do so after a meeting with the general Real Property Law > Construction Law > Contractors & contractor and a property owner. The general contractor Subcontractors was paid in full at closing on the property, but the general Torts > Premises Liability & Property > General contractor did not pay the subcontractor. The Premises Liability > Defenses > Independent subcontractor alleged that a property owner had orally Contractors [HN1] Where the general contractor is fully paid prior to personally guaranteed payment to the subcontractor at the meeting prior to completion of the installation. The court the filing of a mechanic's lien, the lienor may not collect granted summary judgment to the property owners. The from the owner of the property. mechanic's lien was a nullity. The subcontractor's rights were measured by the rights of the general contractor. Page 2 27 Misc. 2d 701, *; 212 N.Y.S.2d 869, **; 1961 N.Y. Misc. LEXIS 3137, ***1

Real Property Law > Construction Law > Contractors & JUDGES: William F. Christiana, [***2] J. Subcontractors Real Property Law > Nonmortgage Liens > Mechanics' OPINION BY: CHRISTIANA Liens [HN2] If a party furnishing materials is unwilling to rely OPINION on the general contractor's integrity, he should protect himself by acting promptly in giving his notice of lien. [*702] [**869] Defendants contracted with one Weaver to purchase a lot in an area known as Brookbound Development. Weaver, who was a general Contracts Law > Secured Transactions > Perfection & contractor, undertook to build a dwelling on the premises Priority > Priority > Liens > Mechanics' Liens sold. The usual deposit was made upon the execution of Real Property Law > Construction Law > Contractors & the agreement. Subcontractors Torts > Premises Liability & Property > General Plaintiff was engaged by Weaver to install the Premises Liability > Defenses > Independent heating equipment in defendants' dwelling. At such time, Contractors plaintiff was also doing other installations for Weaver, [HN3] The rights of a subcontractor as a lienor are who was not only in default on these but was otherwise in measured by whatever rights the general contractor had serious financial difficulties, a fact known to the parties. against the property owners at the time of filing the notice of lien. By reason of Weaver's financial instability, plaintiff, after commencing the Bierau project, refused to complete HEADNOTES the work. Thereupon, [**870] defendant Dudley Bierau and Weaver called on the plaintiff at the latter's office, Liens -- mechanic's lien -- summary judgment where, it is alleged, Bierau made oral commitments dismissing complaint and discharging mechanic's lien which induced plaintiff to finish the installation of granted -- at time of filing lien no fund existed to Bierau's heating system. which lien could attach as defendant owners had paid general contractor in full -- as lien is unenforcible, Title was closed, after some delay, on July 21, 1958, other questions raised must be litigated in separate at which time, Bierau paid Weaver the full balance called action, if at all. for under their contract. Weaver failed to discharge in full his obligation to plaintiff. 1. Defendants' motion for summary judgment dismissing the complaint and discharging a notice of lien Subsequently, and on August 8, 1958, plaintiff filed against their property by a subcontractor is granted. [***3] filed notice of a mechanic's lien against At the time the lien was filed the owners had paid the defendants' property which was continued by order for an general contractor in full, thus extinguishing any rights he additional year. Prior to its extended expiration, plaintiff had against them, so that no fund then existed to which a instituted an action to foreclose such lien. Defendant lien could attach. answered and now moves for summary judgment dismissing the complaint and discharging the lien. 2. As the lien is unenforcible, the questions of whether defendant, by reason of alleged oral It is beyond dispute that [HN1] where the general commitments to plaintiff, became a guarantor of contractor is fully paid prior to the filing of the lien the plaintiff's claim, and whether such oral commitments, if lienor may not collect from the owner of the property. If any, would fall within subdivision 2 of section 31 of the nothing is due the general contractor when the lien is Personal Property Law, are not considered. They may filed, the lienor may not look to the owner of the perhaps be litigated in a separate action. premises for payment. ( Soll v. Camardella, 277 App. Div. 1004; W. E. Blume, Inc. v. Postal Tel. Cable Co., COUNSEL: John N. McLaren for plaintiff. 265 App. Div. 1062; Lien Law, § 4.) The reason is of course obvious. If the property owner is to be exposed to Earl Schram, Jr., for defendants. liens filed after he has fully satisfied his obligation to the general contractor he would be doubly emperiled with Page 3 27 Misc. 2d 701, *702; 212 N.Y.S.2d 869, **870; 1961 N.Y. Misc. LEXIS 3137, ***3 possible liability to every subcontractor and materialman arise under it must cede. to whom the general contractor was committed to make payment. As was indicated as early as [*703] Carman In the opinion of this court, the lien is a nullity. v. McIncrow (13 N. Y. 70) [HN2] if a party furnishing [HN3] The rights of the plaintiff as lienor must be materials is unwilling to rely on the general [***4] measured by whatever rights Weaver, as a general contractor's integrity, he should protect himself by acting contractor, had against defendants at the time of filing the promptly in giving his notice of lien. notice of lien. ( Farm Supplies Corp. v. Goldstein, 240 App. Div. 330; Van Clief v. Van Vechten, 130 N. Y. 571; Even so, plaintiff argues that a question of fact exists Travis v. Nansen, 176 Misc. 44.) [**871] Such rights as to whether defendant, Dudley Bierau, by reason of his had been extinguished [***5] by defendant's payment in conversations with plaintiff, became a guarantor of full to Weaver prior to the time plaintiff filed his notice plaintiff's claim, and for this reason, summary judgment of lien. No fund then existed to which a lien could attach. will not lie. Defendant responds that no question of fact Where there is no fund, there is no lien, and hence there can exist since an oral promise by Bierau, if made, would can be no foreclosure. be confronted with the provisions of subdivision 2 of section 31 of the Personal Property Law. The motion for summary judgment is granted. An order may be submitted on notice, without costs, These questions are secondary. They may perhaps directing judgment in favor of defendants dismissing the be litigated in a separate independent action. The complaint and discharging the notice of lien. primary inquiry on this motion is the validity of the lien. If the lien is unenforcible issues which might otherwise Exhibit Q: County Clerk's instruction (Bond)

Exhibit R: Affirmation for bond-discharge (NY County)

Exhibit S: NYCLS Lien § 34

Exhibit T:Form Waiver

Exhibit U: NYCLS Lien § 37

Exhibit V: NYCLS Lien § 39

Exhibit W: NYCLS Lien § 39a

Exhibit X: NYCLS Lien § 22 Page 1

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*** This section is current through 2014 released chapters 1-25, 50-59 ***

LIEN LAW ARTICLE 2. MECHANICS' LIENS

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NY CLS Lien § 22 (2014)

§ 22. Building loan contract

A building loan contract either with or without the sale of land, and any modification thereof, must be in writing and duly acknowledged, and must contain a true statement under oath, verified by the borrower, showing the consideration paid, or to be paid, for the loan described therein, and showing all other expenses, if any, incurred, or to be incurred in connection therewith, and the net sum available to the borrower for the improvement, and, on or before the date of recording the building loan mortgage made pursuant thereto, to be filed in the office of the clerk of the county in which any part of the land is situated, except that any subsequent modification of any such building loan contract so filed must be filed within ten days after the execution of any such modification. No such building loan contract or any modification thereof shall be filed in the register's office of any county. If not so filed the interest of each party to such contract in the real property affected thereby, is subject to the lien and claim of a person who shall thereafter file a notice of lien under this chapter. A modification of such contract shall not affect or impair the right or interest of a person, who, previous to the filing of such modification had furnished or contracted to furnish materials, or had performed or contracted to perform labor for the improvement of real property, but such right or interest shall be determined by the original contract. The county clerk is entitled to a fee of twenty-five dollars, except in counties within the city of New York where the fee shall be fifty dollars, for filing such a contract or modification. Except where the county clerk maintains a block index, such contracts and modifications thereof shall be indexed in a book provided for that purpose, in the alphabetical order of the names of the persons to whom such loans shall be made. No assignment of the moneys due or to become due under a building loan contract, under the provisions of section twenty-six of this article, nor any payment to the holder of such assignment, shall be or be construed to be a modification of a building loan contract within the meaning of this section, and the execution and delivery of a bond and mortgage, under the provisions of section twenty-six of this article, or payments thereunder, shall not be or be construed to be the making of a building loan contract within the meaning of this section.

liens filed subsequent to the date of the recording of said mortgage whether or not the cash and/or bonds for which said mortgage has been taken as security, shall have been advanced at the time of the execution of such mortgage or subsequent thereto, and it shall not be necessary to execute and file any building loan contract or any other contract, in compliance with this section or any part thereof.

Where the county clerk indexes liens in a block index, every building loan contract presented to the clerk for filing, in order to entitle the same to be filed, shall contain in the body thereof, or shall have endorsed thereon, a designation of the number of every block, on the land map of the county, which is affected by the building loan contract. The county clerk shall cause such building loan contract to be entered in the block index, under the block number of every block so designated. In cases where a building loan contract shall have been filed without such designation or with an erroneous designation, the county clerk, on presentation of proper proof thereof, shall enter such instrument in the proper index, under the proper block number of every block in which the land affected is situated, and shall, at the same time, make a note of such entry and of the date thereof in every place in which such instrument may have been erroneously indexed, opposite the entry thereof, and also upon the instrument itself, if the same be in his possession or produced to him for the purpose, and the filing of such instrument shall be constructive notice as to property in the block not duly designated at the time of such filing only from the time when the same shall be properly indexed.

A county clerk may adopt a new indexing system utilizing electro-mechanical, electronic or any other method he deems suitable for maintaining the indexes.

HISTORY: Add, L 1909, ch 38: amd, L 1916, ch 507, § 13, L 1929, ch 515, § 2, L 1930, ch 859, § 14, L 1935, ch 922, § 3, L 1953, ch 349, § 1, L 1956, ch 793, § 4, eff Sept 1, 1956. Opening par, amd, L 1961, ch 237, § 1, L 1965, ch 811, § 1, L 1994, ch 205, § 1, eff June 28, 1994. Concluding par, add, L 1991, ch 648, § 7, eff July 26, 1991.

NOTES:

Revision Notes [1961, ch 237] This amendment was necessary to complete the changes in the section made by Chapter 793 of the Laws of 1956. The language inserted in § 22 by this act was omitted from chapter 793, Laws of 1956, apparently through inadvertence. The same act of 1956 amended § 122 of the Civil Practice Act and § 10 of the Lien Law and in amending those sections did insert the language which was added by this amendment to § 22.

Practice Insights:

USE OF BUILDING LOAN AGREEMENTS AND MORTGAGES By Brook Boyd, Esq., New York, NY General Editor, Alfred C. Tartaglia, Esq., New York, NY

INSIGHT A building loan in New York State can be used to pay only for most "hard" costs and some "soft" costs of construction, demolition, or repair of real estate (these costs are collectively called "cost of improvement"). A building loan is secured by a building loan mortgage, and is documented by a building loan agreement disclosing the net amount of loan proceeds available to pay such costs. If a building loan is used to pay costs that do not qualify as the "cost of improvement," or if the building loan otherwise does not comply with the Lien Law in even a minor respect, then the Exhibit Y: Title Company Checklists CHECK LIST FOR CLOSERS

BUILDING LOAN MORTGAGES

Closers must affirmatively answer each item below in the space provided when they are satisfied that said items have been complied with.

This check list is not intended to be all inclusive but should be used as a guideline. Closers should refer to the annexed Building Loan Mortgage Exceptions and Requirements sheet.

______1. Do the Building Loan Mortgage and Building Loan Contract contain the covenant required by Section 13, subdivision 3 of the Lien Law?

______2. Do the Building Loan Mortgage and Building Loan Contract make cross reference to each other?

______3. Does the Building Loan Contract contain the borrower's sworn affidavit as required under Section 22 of the Lien Law?

______4. Does this affidavit set forth all initial expenses that are to be disbursed from the proceeds of the loan? (Only those items as permitted as a cost of improvement under Section 2 of the Lien Law may be subtracted from the original amount of the loan - i.e. if prior existing mortgages are to be satisfied, released or assigned. These funds must be itemized.

______5. Does the net sum available for the improvement agree with the amount shown as net sum after all itemized expenses have been subtracted? (Closer must check arithmetic).

______6. Are all Building Loan funds made payable to borrower? If not, do said funds show payment approved by borrower?

______7. Is the affidavit properly executed and acknowledged?

______8. Does our commitment set forth a pending disbursement clause?

______9. Does the Building Loan Mortgage have a "red flag" affixed requiring that the Building Loan Contract be filed prior to recording the mortgage? CHECKLIST

Permissible expenses in Section 22 affidavit:

1. Title charges for building loan 2. Interest on building loan during construction 3. Mortgage tax for building loan 4. Recording fees for building loan 5. Taxes, assessments, water and sewer rents paid or to be paid for periods prior to or during construction 6. Bank inspection and appraisal charges for building loan 7. Insurance premiums during construction 8. Reasonable mortgage broker commissions and lender's attorney's fees for building loan 9. Sums paid to take by assignment prior existing mortgages which are consolidated with the building loan mortgage or to discharge the mortgages or in reduction thereof and accrued interest thereon 10. Architects, engineers or surveyors 11. Premiums on bonds or bonds filed to discharge liens 12. Reimbursement to the owner of payments for above expenses made prior to the date of the initial advance on building loan, and for cost of improvement expenses such as payroll taxes and labor and materials.

Section 22 affidavit must recite less those expenses the net sum remaining available for the cost of improvement.

Non-permissable expenses:

1. Land acquisition costs 2. “soft costs”, e.g. advertising, managing agents, brochures 3. Non-reasonable expenses

The building loan mortgage must contain a Section 13 clause, i.e., that borrower has received the building loan funds in trust for paying for the cost of improvements.

The building loan mortgage must contain a Section-13 clause, i.e., that borrower has received the building loan funds in trust for paying for the cost of improvement.

The building loan mortgage and building loan contract should cross-reference each other. Exhibit Z: Building Loan Agreement Form 8032 — Building Loan Contract

CONSULT YOUR LAWYER BEFORE SIGNING THIS INSTRUMENT—THIS INSTRUMENT SHOULD BE USED BY LAWYERS ONLY. ————————————————— THIS AGREEMENT, made the day of in the year BETWEEN

hereinafter referred to as the borrower, and

hereinafter referred to as the lender,

WHEREAS, the borrower has applied to the lender for a loan of

Dollars, to be advanced as hereinafter provided and to be evidenced by the bond or note of the borrower for the payment of said sum, or so much thereof as shall at any time be advanced thereon, on

with interest upon each amount so advanced from the date of such advance at the rate of per centum per annum to be paid on the day of in the year and thereafter; said bond or note to be secured by a mortgage on the premises described as follows:

ALL that certain plot, piece or parcel of land, with the buildings and improvements thereon erected, situate, lying and being in the

Page 1 WHEREAS, the lender agrees to make said loan upon the terms, covenants and conditions hereinafter set forth, and the borrower agrees to take said loan and expressly covenants to comply with and perform all of the terms, covenants and conditions of this agreement,

NOW, THEREFORE, it is agreed between the parties as follows:

1. The borrower expressly covenants to make on said premises the improvement described below in accordance with the plans and specifications therefor which, before the making of the first advance hereunder, the borrower agrees to file with all governmental authorities having jurisdiction and to obtain all necessary approvals of said plans and specifications and all necessary building permits from said authorities. The said plans and specifications shall first be submitted to and approved by the lender in writing; and no changes or amendments thereto shall be made without first obtaining the written approval of the lender. The said improvement to be made shall be as follows:

2. With the approval of the lender, the loan may be evidenced by more than one bond or note aggregating the amountofsaidloan and be secured by more than one mortgage each covering a portion of the said premises; in that case reference herein made to the bond, note or mortgage shall be deemed to include all of the said bonds, notes or mortgages.

3. With the approval of the lender, the bond or note and mortgage may, for the convenience of the borrower, be written for a sum larger than the amount of the loan above specified, but in no case will the lender be obligated to advance more than the amount of the loan so specified.

4. The said bond or note and mortgage shall be upon the standard forms promulgated by the former NEW YORK BOARD OF TITLE UNDERWRITERS or, at the option of the lender, upon such other forms and containing such clauses as the lender shall determine are needed for the lender’s protection, and the mortgage shall be executed and acknowledged by all parties necessary to make it, as determined by the lender’s attorney, a valid lien on a good and marketable title in fee to said premises and on the said fixtures and personal property to be covered thereby for all sums that may be advanced, free and clear of all liens, encumbrances and defects, except those, if any, to which the lender has expressly agreed herein to take subject or which the lender may hereafter waive. The said bond or note and mortgage are to be delivered on the day of in the year at M., at the office of

5. The borrower at the time of the execution of this agreement or, at the option of the lender, at the time fixed for the delivery of the mortgage, shall pay all fees and charges agreed to be paid including the fees, if any, for the procuring and making of said loan and the charges for the examination of the title to said premises, surveys, appraisals, inspections and drawing of papers, and shall also pay the recording fees and mortgage recording tax and cost of revenue stamps, if any, and architects’, engineers’ and building loan service fees.

6. The said loan is to be advanced at such times and in such amounts as the lender shall determine, but tentatively in installments in accordance with the following schedule:

SCHEDULE OF PAYMENTS

The lender may, as provided in Paragraph 7 of this agreement, advance parts or the whole of any installments before they become due in accordance with this schedule.

7. No advance shall be due unless, in the judgment of the lender, all work usually done at the stage of construction when the advance is made payable be done in a good and workmanlike manner, and all materials and fixtures usually furnished and installed at that time are furnished and installed, and unless all construction be approved by an engineer or architect satisfactory to the lender, but the lender may advance parts or the whole of any installments before they become due, if the lender believes it advisable so to do, and all such advances or payments shall be deemed to have been made in pursuance of this agreement and not to be modifications thereof. The making of any advance or any part of an advance shall not be deemed an approval or acceptance by the lender of the work theretofore done. Any advance or installment of any part or parts thereof may be postponed or deferred by mutual consent of the borrower and the lender, and any such postponement or postponements shall be deemed to be in pursuance of this agreement and not in modification thereof. A receipt for any advance shall be binding on the borrower although signed by any one of the individual parties constituting the borrower, any one partner, if the borrower is a partnership, and any one officer, if the borrower is a corporation. 8. The lender may require five days’ notice in writing from the borrower before an advance shall be called for. All advances are to be made at the office of the lender or at such other place as the lender shall designate. 9. The lender may at any time release portions of the mortgaged premises from the provisions of this agreement and from the mortgage executed and delivered pursuant thereto upon such terms and conditions as the lender shall deem fit. 10. The lender may at any time extend the payment of the principal secured by said bond or note and mortgage, and any extensions so granted shall be deemed made in pursuance of this agreement and not to be modifications thereof. 11. The borrower shall furnish to the lender, on or before the making of the final advance, the final certificates of approval, including certificate of occupancy, of the various governmental authorities having jurisdiction and the certificate of the Board of Fire Underwriters acting in and for the locality in which the said premises are situated. 12. The borrower shall furnish to the lender, or the lender may procure at the expense of the borrower, surveys made by a surveyor satisfactory to the lender whenever required by the lender. 13. The borrower shall furnish to the lender, premiums prepaid, or the lender may procure at the expense of the borrower, insurance policies in companies, forms and amounts satisfactory to such lender insuring the premises against loss or damage by fire, with the usual extended coverage endorsement, and other hazards as may reasonably be required by the lender. 14. The lender may at the expense of the borrower employ a watchman to protect the buildings and their contents from depredation or injury. 15. If the construction of said buildings be at any time discontinued or not carried on with reasonable dispatch in the judgment of lender, said lender may purchase materials and employ workmen to protect said buildings so that the same will not suffer from depredation or the weather, or to complete said buildings, so that they may be used for the purposes for which they are designed under the said plans and specifications. 16. All sums paid or expended in accordance with any of the foregoing provisions shall be deemed advances to the borrower and secured by said bond or note and mortgage and may be applied, at the option of the lender, to any advances thereafter becoming due. 17. The lender may deduct from any payment to be made under this agreement any amount necessary for the payment of any fees and expenses relating to the examination of the title to said premises, including cost of surveys, charges for appraisals, inspections, drawing of papers, mortgage recording tax, revenue stamps, if any, and architects’, engineers’ and building loan service fees, and any expenses incurred in the procuring or the making of the said loan, and in the payment of any insurance premiums, mortgages, tax, assessment, water rate, sewer rents and other charges, liens and encumbrances upon the said premises whether before or after the making of said loan and any other amounts necessary for the payment of the cost of improvement as defined by the Lien Law, and apply such amounts in making said payments, and all sums so applied shall be deemed advances under this agreement and secured by said bond or note and mortgage. 18. The lender may cause said loan to be made by some other person or corporation. The bond or note and mortgage shall then run to said person or corporation. The provisions of this agreement shall apply to such bond or note and mortgage, and if the loan be so made, it shall be deemed a compliance by the lender with this agreement. The lender may assign this agreement and the bond or note and mortgage and cause the assignee or any subsequent assignee to make any advances not made at the time of the assignment, and all the provisions of this agreement shall continue to apply to said loan and bond or note and mortgage. In case the loan is made in accordance with any of the methods mentioned in this paragraph 18, it shall be deemed a compliance by the lender with this agreement and to have been made pursuant thereto and not to be a modification thereof, and the advances so made shall be secured by said bond or note and mortgage. 19. In the event of the death of the borrower while still holding title to the mortgaged premises, the lender may, at the option of the lender, in case the work upon the said improvement is continued as provided in this agreement, continue to make advances under this agreement and subject to all its terms and conditions to the borrower’s executors or administrators; and all sums so advanced by the lender shall be deemed advances under this agreement, and not to be modifications thereof, as if made to the borrower in his lifetime, and shall be secured by said bond or note and mortgage. 20. The borrower will not assign this contract or the moneys due thereunder or convey or encumber the property without the written consent of the lender, but in such event the lender may nevertheless at the option of the lender continue to make advances under this agreement to the borrower or to those who succeed to the borrower’s title; and all sums so advanced by the lender shall be deemed advances under this agreement, and not to be modifications thereof, and shall be secured by said bond or note and mortgage. 21. The borrower further agrees: (i) where stairs are required, to erect the permanent stairs with temporary treads as rapidly as the framework erected will permit; (ii) to submit to the lender, for the lender’s approval the details of the floor construction and framing plans before the contract therefor is let; (iii) to give the lender sufficient notice (a) when tests of the plumbing and heating systems and structural work are to be made; any further tests required by the lender are to be made by the contractors for such work under the direction of the lender at the expense of the borrower; (b) to permit an examination of all bottoms before any foundation materials are placed or used; and (c) to make an inspection after floor filling is completed and before the wood flooring is laid in each story. 22. In case city sewers have not been installed or the street or streets adjacent to the said premises have not been paved, the borrower shall install and properly connect sewers of city specifications as to size and quality and shall pave such street or streets so as to have the same conform to the established city grade thereof; and the borrower shall, upon demand, furnish evidence satisfactory to the lender of compliance with the provisions hereof. 23. The borrower covenants and agrees not to do any act or thing prohibited by the terms of this agreement, and it is expressly agreed that in any of the following events all obligation on the part of the lender to make said loan or to make any further advance shall, if the lender so elect, cease and terminate, and the said bond or note and mortgage shall, at the option of the lender, become immediately due and payable, but the lender may make any advances or parts of advances after the happening of any of the following events without thereby waiving the right to demand payment of the mortgage debt and without becoming liable to make any other or further advances: (a) If the mortgage offered by the borrower does not give to the lender a good and sufficient lien for the indebtedness to be secured thereby on said premises satisfactory to the lender’s attorney. (b) If at the time any payment is due to the borrower the title is not satisfactory to the lender’s attorney, regardless of whether the lien, encumbrance or other question existed at the time of any prior advance. (c) If the borrower assigns this contract or any of said advances or any interest therein, or if said premises are conveyed or encumbered in any way without the written consent of the lender, or if the borrower dies before receiving the final advance hereunder. (d) If a survey shows that the improvement on said premises encroaches upon the street or upon adjoining property, or any adjoining structure encroaches upon said premises to an extent deemed material by the lender’s attorney. (e) If the borrower does not take the loan or the advances within thirty days after they are made pay able, or in case where the payment of advances is dependent upon the erection of a new building, the building be not fully enclosed within months from date hereof or in any event if the improvement be not fully completed and ready for occupancy within months from date hereof. (f) If the improvement on said premises is, in the judgment of the lender, materially injured or destroyed by fire or otherwise. (g) If a petition in bankruptcy is filed by or against the borrower or a receiver or trustee of the property of the borrower is appointed; or if the borrower files a petition for reorganization under any of the provisions of the Bankruptcy Act or of any other law, state or federal, or makes an assignment for the benefit of creditors or is adjudged insolvent by any state or federal court of competent Jurisdiction. (h) If the borrower does not make said improvement in accordance with plans and specifications which are previously furnished to and approved in writing by the lender and which have been filed with and approved by all governmental authorities having jurisdiction, and in accordance with all laws, rules, regulations and requirements of such governmental authorities existing at the commencement of the improvement and any amendments thereof and additions thereto made with the written approval of the lender during the construction of the improvement or fails to file amended or supplemental plans and specifications, if required because of such amendments and additions after first obtaining the written approval thereof by the fender and the approval of such governmental authorities; or if the borrower fails to furnish the lender with a written certificate issued by the department of the governmental authority in the locality in which the property is situated having jurisdiction thereof approving said plans and specifications and any amended and supplemented plans and specifications where such department has jurisdiction. (i) If the owner of said premises does not permit the lender, or representatives of the lender to enter upon said premises and inspect the improvement thereon at all reasonable times and examine all detailed plans, shop drawings and specifications which are kept at the work, or fails to furnish to them, when requested, copies of such plans, drawings and specifications. (j) If for any cause whatever the construction of said improvement is at any time discontinued or not carried on with reasonable dispatch in the judgment of the lender. (k) If the borrower executes any chattel mortgage on any materials, fixtures or articles used in the construction or operation of the improvement or appurtenant thereto, or articles of personal property placed in said premises, or if any such materials, fixtures or articles are not satisfactory to the lender or are purchased on conditional bill of sale or otherwise so that the ownership thereof will not vest unconditionally in the borrower, free from encumbrance, on delivery at the premises; and if the borrower does not furnish to the lender, if requested, the contracts, bills of sale, statements, receipted vouchers and agreements, or any of them, under which the borrower claims title to such materials, fixtures and articles. (l) If the borrower fails to comply with any requirement of any governmental authority having jurisdiction within thirty days after notice in writing of such requirement shall have been given to said borrower; or fails to furnish to the lender, when requested, official searches made by the governmental authorities having jurisdiction. (m) If the borrower does not disclose to the lender, upon demand, the names of all persons with whom the borrower contracted or intends to contract for the construction of said improvement or the furnishing of labor or materials therefor. (n) If the borrower permits any purchaser or prospective purchaser to occupy the premises before this agreement shall have been fully performed and the final advance made thereunder. (o) If the borrower fails to keep, observe or perform any of the conditions, stipulations, agreements or covenants contained in this agreement or in the said bond or note or mortgage. 24. In the event that more than one mortgage is executed pursuant to this agreement and there should be any default by the borrower in the performance of any of the conditions, stipulations, agreements and covenants contained in this agreement or in any of the bonds or notes and mortgages given in connection therewith, then, at the option of the lender, the principal indebtedness secured by all or any of such bonds or notes and mortgages shall immediately become due and payable and all or any such mortgages may be foreclosed in either one or more actions, and any judgment of foreclosure and sale obtained therein may direct that the mortgaged premises covered by all the mortgages sought to be foreclosed in such action be sold in one parcel. 25. The borrower, in compliance with Section 13 of the Lien Law, covenants that the borrower will receive the advances to be made hereunder and to be secured by the mortgage executed pursuant hereto and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of improvement, and will apply the same first to the payment of the cost of improvement before using any part of the total of the same for any purpose. 26. And it is mutually understood and agreed by and between the parties hereto on behalf of themselves and their respective personal representatives or successors in interest that the bond or note and mortgage contemplated to be executed, acknowledged and delivered pursuant to this agreement shall be made subject to all the conditions, stipulations, agreements and covenants contained in this agreement, to the same extent and effect as they would be if fully set forth in and made part of said bond or note and mortgage, until this agreement is terminated by the completion of the improvement described herein and the making of the final advance hereunder as provided for herein; and it is further expressly understood and agreed that this agreement is made subject to all the conditions, stipulations, agreements and covenants contained in said bond or note and mortgage, to the same extent and effect as they would be if fully set forth herein and made part hereof.

A true statement under oath, verified by the borrower as required by Section 22 of the Lien Law, is attached hereto and made part of this agreement. This agreement may not be changed or terminated orally. Wherever the word “lender” is used herein it shall be deemed to include also the personal representatives, successors and assigns of the lender. IN WITNESS WHEREOF, the parties hereto have duly executed this agreement the day and year first above written.

IN PRESENCE OF: STATE OF NEW YORK, COUNTY OF ss.: being duly sworn, deposes and says: I reside at No. I am the of the borrower mentioned in the within building loan contract. The consideration paid, or to be paid, by the borrower to the lender for the loan described therein is Dollars ($ ), and that all other expenses incurred, or to be incurred, in connection with said loan are as follows:

Broker’s commission, $ Sums paid to take by assignment prior existing mortgages which are consolidated with building loan Examination and insurance of mortgages and also the interest title and recording fees, $ charges on such mortgages, $

Sums paid to discharge or reduce the Mortgage tax, Architect’s, indebtedness under mortgages and engineer’s and surveyor’s fees, $ accrued interest thereon and other prior existing encumbrances, $ Internal revenue stamp taxes, $ Sums paid to discharge building loan mortgages whenever recorded, $ Inspections, $ Taxes, assessments, water rents and Appraisals, $ sewer rents paid (existing prior to commencement of improvement). $

Conveyancing, $

Building loan service fees, $

and that the net sum available to the said borrower for the improvement is Dollars, ($ ), less such amounts as may become due or payable for insurance premiums, interest on building loan mortgages, ground rent, taxes, assessments, water rents and sewer rents accruing during the making of the improvement.

This statement is made pursuant to Section 22 of the Lien Law of the State of New York. The facts herein stated are true to the knowledge of the deponent.

______

Sworn to before me this day of in the year STATE OF NEW YORK, COUNTY OF On the day of in the year , STATE OF before me, the undersigned, personally appeared On the day of in the year , before me, the undersigned, personally appeared , personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and , personally known to me or proved to me acknowledged to me that he/she/they executed the same in on the basis of satisfactory evidence to be the individual(s) whose his/her/their capacity(ies), and that by his/her/their signature(s) on name(s) is (are) subscribed to the within instrument and the instrument, the individual(s), or the person on behalf of which acknowledged to me that he/she/they executed the same in the individual(s) acted, executed the instrument. his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person on behalf of which the individual(s) acted, executed the instrument [add the following if the acknowledgment is taken outside NY State] and that said individual made such appearance before the undersigned in the (insert the city or other political subdivision and the State or country or other place the acknowledgment was taken).

STATE OF , COUNTY OF On the day of in the year , before me, the undersigned, a Notary Public in and for said State, personally appeared STATE OF , COUNTY OF On the day of in the year , , the before me personally came subscribing witness to the foregoing instrument, with whom I am personally acquainted, who, being by me duly sworn, did depose to me known, who, being by me duly sworn, did depose and say and say that he/she/they reside(s) in that he resides at that heisthe (if the place of residence is in a city, include the street and street number if any, of thereof);that he/she/they know(s) the corporation described in and which executed the foregoing

to be the individual described in and who executed the foregoing instrument; that he knows the seal of said corporation; that the instrument; that said subscribing witness was present and saw seal affixed to said instrument is such corporate seal; that it was said so affixed by order of the board of directors of said corporation, and that he signed h name thereto by like order.

execute the same; and that said witness at the same time subscribed his/her/their name(s) as a witness thereto

[add the following if the acknowledgment is taken outside NY State] and that said subscribing witness made such appearance before the undersigned in the (insert the city or other political subdivision and the State or country or other place the proof was taken).

Building Loan Contract SECTION BLOCK TITLE NO. LOT

COUNTY OR TOWN

Distributed By . RETURN BY MAIL TO: Exhibit AA: Building Loan Mortgage Form 8017 — Building Loan Mortgage – Individual or Corporation Revised 1/97

CONSULT YOUR LAWYER BEFORE SIGNING THIS INSTRUMENT—THIS INSTRUMENT SHOULD BE USED BY LAWYERS ONLY. —————————————————

THIS MORTGAGE, made the day of , in the year BETWEEN

, the mortgagor, and

, the mortgagee, WITNESSETH, that to secure the payment of an indebtedness in the sum of dollars, lawful money of the United States or so much thereof as may be advanced, to be paid

with interest thereon to be computed from the date of each advance, at the rate of per centum per annum, and to be paid on the day of in the year , next ensuing and thereafter,

according to a certain bond, note or obligation bearing even date herewith, the mortgagor hereby mortgages to the mortgagee ALL that certain plot, piece or parcel of land, with the buildings and improvements thereon erected, situate, lying and being in the

TOGETHER with all right, title and interest of the mortgagor in and to the land lying in the streets and roads in front of and adjoining said premises; TOGETHER with all fixtures, chattels and articles of personal property now or hereafter attached to or used in connection with said premises, including but not limited to furnaces, boilers, oil burners, radiators and piping, coal stokers, plumbing and bathroom fixtures, refrigeration, air conditioning and sprinkler systems, wash-tubs, sinks, gas and electric fixtures, stoves, ranges, awnings, screens, window shades, elevators, motors, dynamos, refrigerators, kitchen cabinets, incinerators, plants and shrubbery and all other equipment and machinery, appliances, fittings, and fixtures of every kind in or used in the operation of the buildings standing on said premises, together with any and all replacements thereof and additions thereto; TOGETHER with all awards heretofore and hereafter made to the mortgagor for taking by eminent domain the whole or any part of said premises or any easement therein, including any awards for changes of grade of streets, which said awards are hereby assigned to the mortgagee, who is hereby authorized to collect and receive the proceeds of such awards and to give proper receipts and acquittances therefor, and to apply the same toward the payment of the mortgage debt, notwithstanding the fact that the amount owing thereon may not then be due and payable; and the said mortgagor hereby agrees, upon request, to make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning said awards to the mortgagee, free, clear and discharged of any encumbrances of any kind or nature whatsoever. AND the mortgagor covenants with the mortgagee as follows: 1. That the mortgagor will pay the indebtedness as hereinbefore provided. 2. That the mortgagor will keep the buildings on the premises insured (i) against loss by fire for the benefit of the mortgagee, (ii) against loss by flood if the premises are located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of nineteen hundred sixty-eight; that he will assign and deliver the policies to the mortgagee; and that he will reimburse the mortgagee for any premiums paid for insurance made by the mortgagee on the mortgagor’s default in so insuring the buildings or in so assigning and delivering the policies. 3. That no building on the premises shall be altered, removed or demolished without the consent of the mortgagee. 4. That the whole of said principal sum and interest shall become due at the option of the mortgagee: after default in the payment of any instalment of principal or of interest for fifteen days; or after default in the payment of any tax, water rate, sewer rent or assessment for thirty days after notice and demand; or after default after notice and demand either in assigning and delivering the policies insuring the buildings against loss by fire or in reimbursing the mortgagee for premiums paid on such insurance, as hereinbefore provided; or after default upon request in furnishing a statement of the amount due on the mortgage and whether any offsets or defenses exist against the mortgage debt, as hereinafter provided. An assessment which has been made payable in instalments at the application of the mortgagor or lessee of the premises shall nevertheless, for the purpose of this paragraph, be deemed due and payable in its entirety on the day the first instalment becomes due or payable or a lien. 5. That the holder of this mortgage, in any action to foreclose it, shall be entitled to the appointment of a receiver. 6. That the mortgagor will pay all taxes, assessments, sewer rents or water rates, and in default thereof, the mortgagee may pay the same. 7. That the mortgagor within five days upon request in person or within ten days upon request by mail will furnish a written statement duly acknowledged of the amount due on this mortgage and whether any offsets or defenses exist against the mortgage debt. 8. That notice and demand or request may be in writing and may be served in person or by mail. 9. That the mortgagor warrants the title to the premises. 10. That the fire insurance policies required by paragraph No. 2 above shall contain the usual extended coverage endorsement; that in addition thereto the mortgagor, within thirty days after notice and demand, will keep the premises insured against war risk and any other hazard that may reasonably be required by the mortgagee. All of the provisions of paragraphs No. 2 and No. 4 above relating to fire insurance and the provisions of Section 254 of the Real Property Law construing the same shall apply to the additional insurance required by this paragraph. 11. That in case of a foreclosure sale, said premises, or so much thereof as may be affected by this mortgage, may be sold in one parcel, 12. That if any action or proceeding be commenced (except an action to foreclose this mortgage or to collect the debt secured thereby), to which action or proceeding the mortgagee is made a party, or in which it becomes necessary to defend or uphold the lien of this mortgage, all sums paid by the mortgagee for the expense of any litigation to prosecute or defend the rights and lien created by this mortgage (including reasonable counsel fees), shall be paid by the mortgagor, together with interest thereon at the rate of six per cent. per annum, and any such sum and the interest thereon shall be a lien on said premises, prior to any right, or title to interest in or claim upon said premises attaching or accruing subsequent to the lien of this mortgage, and shall be deemed to be secured by this mortgage. In any action or proceeding to foreclose this mortgage, or to recover or collect the debt secured thereby, the provisions of law respecting the recovering of costs, disbursements and allowances shall prevail unaffected by this covenant. 13. That the mortgagor hereby assigns to the mortgagee the rents, issues and profits of the premises as further security for the payment of said indebtedness, and the mortgagor grants to the mortgagee the right to enter upon and to take possession of the premises for the purpose of collecting the same and to let the premises or any part thereof, and to apply the rents, issues and profits, after payment of all necessary charges and expenses, on account of said indebtedness. This assignment and grant shall continue in effect until this mortgage is paid. The mortgagee hereby waives the right to enter upon and to take possession of said premises for the purpose of collecting said rents, issues and profits, and the mortgagor shall be entitled to collect and receive said rents, issues and profits until default under any of the covenants, conditions or agreements contained in this mortgage, and agrees to use such rents, issues and profits in payment of principal and interest becoming due on this mortgage and in payment of taxes, assessments, sewer rents, water rates and carrying charges becoming due against said premises, but such right of the mortgagor may be revoked by the mortgagee upon any default, on five days’ written notice. The mortgagor will not, without the written consent of the mortgagee, receive or collect rent from any tenant of said premises or any part thereof for a period of more than one month in advance, and in the event of any default under this mortgage will pay monthly in advance to the mortgagee, or to any receiver appointed to collect said rents, issues and profits, the fair and reasonable rental value for the use and occupation of said premises or of such part thereof as may be in the possession of the mortgagor, and upon default in any such payment will vacate and surrender the possession of said premises to the mortgagee or to such receiver, and in default thereof may be evicted by summary proceedings. 14. That the whole of said principal sum and the interest shall become due at the option of the mortgagee: (a) after failure to exhibit to the mortgagee, within ten days after demand, receipts showing payment of all taxes, water rates, sewer rents and assessments; or (b) after the actual or threatened alteration, demolition or removal of any building on the premises without the written consent of the mortgagee; or (c) after the assignment of the rents of the premises or any part thereof without the written consent of the mortgagee; or (d) if the buildings on said premises are not maintained in reasonably good repair; or (e) after failure to comply with any requirement or order or notice of violation of law or

STATE OF NEW YORK, COUNTY OF On the day of in the year , STATE OF before me, the undersigned, personally appeared On the day of in the year , before me, the undersigned, personally appeared , personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose , personally known to me or proved to me name(s) is (are) subscribed to the within instrument and on the basis of satisfactory evidence to be the individual(s) whose acknowledged to me that he/she/they executed the same in name(s) is (are) subscribed to the within instrument and his/her/their capacity(ies), and that by his/her/their signature(s) on acknowledged to me that he/she/they executed the same in the instrument, the individual(s), or the person on behalf of which his/her/their capacity(ies), and that by his/her/their signature(s) on the individual(s) acted, executed the instrument. the instrument, the individual(s), or the person on behalf of which the individual(s) acted, executed the instrument [add the following if the acknowledgment is taken outside NY State] and that said individual made such appearance before the undersigned in the (insert the city or other political subdivision and the State or country or other place the acknowledgment was taken).

STATE OF , COUNTY OF On the day of in the year , before me, the undersigned, a Notary Public in and for said State, STATE OF , COUNTY OF personally appeared On the day of in the year , , the before me personally came subscribing witness to the foregoing instrument, with whom I am personally acquainted, who, being by me duly sworn, did depose to me known, who, being by me duly sworn, did depose and say and say that he/she/they reside(s) in that he resides at that heisthe (if the place of residence is in a city, include the street and street number if any, of thereof);that he/she/they know(s) the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the to be the individual described in and who executed the foregoing seal affixed to said instrument is such corporate seal; that it was instrument; that said subscribing witness was present and saw so affixed by order of the board of directors of said corporation, said and that he signed h name thereto by like order.

execute the same; and that said witness at the same time subscribed his/her/their name(s) as a witness thereto

Building Loan Mortgage SECTION BLOCK TITLE NO. LOT

COUNTY OR TOWN

Distributed By

RETURN BY MAIL TO: Exhibit BB: Form Section 22 Affidavit

Exhibit CC: Nanuet Nat'l Bank v. Eckerson Terrace, Inc.417 N.Y.S. 2d 901 Page 1

1 of 51 DOCUMENTS

Nanuet National Bank, Appellant, v. Eckerson Terrace, Inc., et al., Defendants, and Token Carpentry, Inc., et al., Respondents

[NO NUMBER IN ORIGINAL]

Court of Appeals of New York

47 N.Y.2d 243; 391 N.E.2d 983; 417 N.Y.S.2d 901; 1979 N.Y. LEXIS 2065

April 26, 1979, Argued June 7, 1979, Decided

PRIOR HISTORY: Appeal, by permission of the subordinate rather than superior to their own liens. They Appellate Division of the Supreme Court in the Second argued that since the bank expected to, and did, deduct Judicial Department, from an order of said court, entered the expenses of procuring the loan from its gross amount, February 14, 1978, which affirmed an order of the it must have realized that considerably less than $ Supreme Court at Special Term (Morton B. Silberman, 108,000 would in fact be the net sum available for the J.), entered in Rockland County, denying various motions improvements. On cross motions for summary judgment, and cross motions for summary judgment. The following Special Term held that the mortgage of a lender question was certified by the Appellate Division: "Was knowingly filing a materially false building loan the order of this Court, dated February 14, 1978, properly statement is subordinated to subsequent mechanics' liens, made?" and denied the motions on the ground that whether the statement was materially false and whether the bank had Nanuet National Bank held a building loan mortgage knowledge thereof were disputed questions of fact. The on three parcels of land developed by Eckerson Terrace, Appellate Division affirmed. Inc., which requested an advance of $ 108,000. Complying with the requirements of section 22 of the The Court of Appeals affirmed the order of the Lien Law for perfecting a lien on the property in favor of Appellate Division, and answered the question certified the lender, the borrower executed, and the bank filed, a in the affirmative, holding, in an opinion by Judge statement of the consideration of the loan and of the net Fuchsberg, that under section 22 of the Lien Law, a sum available to the borrower for the improvement. The lender that knowingly files a building loan contract that statement indicated that the consideration and the sum materially misrepresents the net sum available to the available were each $ 108,000. Respondents Token borrower for the improvement suffers a subordination of Carpentry, Inc., and Leon's Plumbing & Heating, Inc., its mortgage to subsequently arising mechanics' liens. performed work and supplied materials for which they qualified as mechanics' lienors on the property, and their Nanuet Nat. Bank v Eckerson Terrace, 61 AD2d liens were duly filed. The borrower defaulted in its 810. Nanuet Nat. Bank v Eckerson Terrace, 47 NY2d . obligations to the bank, resulting in a foreclosure action, in which the borrower as well as the mechanics' lienors DISPOSITION: Order affirmed, with costs. Question were named as defendants. Said lienors contended that certified answered in the affirmative. misstatements in the bank's filing rendered its interest CASE SUMMARY: Page 2 47 N.Y.2d 243, *; 391 N.E.2d 983, **; 417 N.Y.S.2d 901, ***; 1979 N.Y. LEXIS 2065

PROCEDURAL POSTURE: Appellant bank sought Priority > Priority > Liens > Mechanics' Liens review of an order from the Appellate Division of the Real Property Law > Nonmortgage Liens > Lien Supreme Court in the Second Judicial Department (New Priorities York), which held the bank's mortgage was subordinate, [HN1] Under N.Y. Lien Law § 22, a lender that pursuant to N.Y. Lien Law § 22, to respondent knowingly files a building loan contract that materially contractors' subsequent mechanics' liens because the bank misrepresents the net sum available to a borrower for an had knowingly filed a materially false building loan improvement suffers a subordination of its mortgage to statement. subsequently arising mechanics' liens.

OVERVIEW: The bank agreed to make a loan to a developer, and having complied with the requirements of Real Property Law > Nonmortgage Liens > Lien N.Y. Lien Law § 22 for perfecting a lien on the Priorities developer's property in favor of the bank, the developer Real Property Law > Nonmortgage Liens > Mechanics' executed, and the bank filed, a statement of the Liens consideration of the loan and of the net sum available to [HN2] N.Y. Lien Law § 22 states that information as to the developer. Thereafter, the developer hired the the consideration for a loan, related expenses, and the net contractors to supply material and perform work, and the amount available to a borrower must be filed, and if not contractors filed mechanics' liens on the property. When so filed, the interest of each party to such contract in the the developer defaulted on its obligations to the bank, the real property affected thereby is subject to subsequent contractors claimed that misstatements in the bank's filing mechanics' liens. had rendered its interest subordinate rather than superior to the contractors' liens. After the appellate court found in Governments > Legislation > Interpretation favor of the contractors, the bank sought review, and the [HN3] The intent of legislators, if ascertainable, is a court reversed. Pursuant to § 22, the court held that particularly important guide to the court's statutory because the bank had knowingly filed a building loan construction. contract that materially misrepresented the net sum available to the developer, the bank had suffered a subordination of its mortgage to the subsequently arising Contracts Law > Types of Contracts > Covenants mechanics' liens. Real Property Law > Financing > Mortgages & Other Security Instruments > General Overview OUTCOME: The court affirmed an order that held the Real Property Law > Nonmortgage Liens > Lien bank's mortgage was subordinate to the contractors' Priorities subsequent mechanics' liens. [HN4] Relevant portions of N.Y. Lien Law § 13(3) reads that every such building loan mortgage and every CORE TERMS: borrower, lender's, mortgage, building mortgage recorded subsequent to the commencement of loan, contractor, mechanics' liens, mechanics', the improvement and before the expiration of four knowingly, real estate, materially false, subordination, months after the completion of the improvement shall building loan, Lien Law, real property, lienor, covenant, contain a covenant by the mortgagor that he will receive true statement, net amount, reasonable interpretation, the advances secured thereby and will hold the right to duly filed, misrepresents, misstatements, foreclosure, receive such advances as a trust fund to be applied first materially, inaccurate, notice, materialman, mortgagor, for the purpose of paying the cost of improvement, and executing, developer that he will apply the same first to the payment of the cost of improvement before using any part of the total of the LexisNexis(R) Headnotes same for any other purpose, provided, however, that if the party executing the building loan contract is not the owner of the fee but is the party to whom such advances are to be made, a building loan contract executed and filed pursuant to N.Y. Lien Law § 22 shall contain the Contracts Law > Defenses > Fraud & said covenant by such party executing such building loan Misrepresentation > General Overview contract, in place of the covenant by the mortgagor in the Contracts Law > Secured Transactions > Perfection & Page 3 47 N.Y.2d 243, *; 391 N.E.2d 983, **; 417 N.Y.S.2d 901, ***; 1979 N.Y. LEXIS 2065 building loan mortgage as hereinbefore provided. loan made available to the owner, and the more Nothing in this subdivision shall be considered as reasonable interpretation of the statute is that which imposing upon the lender any obligation to see to the subjects the lender's interest to the subordination penalty proper application of such advances by the owner. if it knowingly files a materially false statement.

COUNSEL: Samuel Kirschenbaum for appellant. The Banking Law > Criminal Offenses > Schemes to construction of section 22 of the Lien Law, by the Second Defraud > Penalties Department is contrary to the legislative intent. Real Property Law > Nonmortgage Liens > Lien Priorities Donald Tirschwell for respondents. I. Where a lender has Real Property Law > Nonmortgage Liens > Mechanics' knowledge of a material misrepresentation of the net sum Liens available for the improvement in the borrower's affidavit, [HN5] A reasonable interpretation of N.Y. Lien Law § 22 subsequently filed mechanics' liens take precedence over is that which subjects a bank's interest to the the mortgage. (HNC Realty Co. v Golan Hgts. subordination penalty if it knowingly files a materially Developers, 79 Misc 2d 696; Ulster Sav. Bank v Total false statement. Obviously, because a false filing is a Communities, 55 AD2d 278.) II. The borrower's snare for the unwary contractor no matter who is statement was materially false and the lender actually responsible for misleading information, a balanced knew of such misstatement. III. Legislative history and analysis must focus on optimizing the likelihood that background of section 22 of Lien Law. IV. Section 13 of deception will not occur. The threat of a loss of priority is the Lien Law does not grant absolution to lenders who an effective deterrent to a lender's indifference to the knowingly violate section 22 of the Lien Law. V. Courts truthfulness of its client's statement; in contrast, a below erred in ruling that lender's affidavit which borrower has no priority to lose. A bank cannot with combined three separate improvements and reflected the impunity file a statement it knows is inaccurate. In short, total sum available for the three improvements was a bank's role is a responsible one. It is neither perfunctory compliance with the requisites of section 22 of the Lien nor ministerial. Law.

JUDGES: Chief Judge Cooke and Judges Jasen, Governments > Legislation > Interpretation Gabrielli, Jones and Wachtler concur with Judge Real Property Law > Nonmortgage Liens > Lien Fuchsberg. Priorities [HN6] The N.Y. Lien Law provisions are to be construed OPINION BY: FUCHSBERG liberally to secure the provision's beneficial interests and purposes, pursuant to N.Y. Lien Law § 23. OPINION

HEADNOTES [*245] [**984] [***902] OPINION OF THE COURT Liens -- Mechanic's Lien Resolving a dichotomy among departments of the Under section 22 of the Lien Law, which provides Appellate Division on a matter of no small consequence that a building loan contract must contain a true statement to the construction and banking industries, we hold that showing, among other things, the net amount available to [HN1] under section 22 of the Lien Law a lender that the borrower, which is to be filed, and if not so filed the knowingly files a building loan contract that materially interest of each party to such contract in the real property misrepresents the net sum available to the borrower for affected thereby is subject to subsequent mechanics' the improvement suffers a subordination of its mortgage liens, a lender that knowingly files a building loan to subsequently arising mechanics' liens. contract that materially misrepresents the net sum available to the borrower for the improvement suffers a Appellant Nanuet National Bank is the holder of a subordination of its mortgage to subsequently arising building loan mortgage on three parcels of real estate mechanics' liens; one of the purposes of section 22 was to developed for residential use by Eckerson Terrace, Inc., readily enable a contractor to learn exactly what sum the which requested an advance of $ 36,000 on each plot for Page 4 47 N.Y.2d 243, *245; 391 N.E.2d 983, **984; 417 N.Y.S.2d 901, ***902; 1979 N.Y. LEXIS 2065 a total of $ 108,000. Having agreed to make the loan, the out that, since the bank expected to, and indeed did, bank saw to it that Eckerson followed the procedure deduct the expenses of procuring the loan from its gross dictated by section 22 for perfecting a lien on the amount, it must have realized that considerably less than property in favor of the lender. Complying with those $ 108,000 would in fact be "the net sum available * * * requirements, the borrower executed, and the bank for the improvement". 2 On the other hand, the bank's thereafter duly filed, a statement of the consideration for position, stripped of unnecessary trimmings, is that the the loan and of the "net sum available to the said misstatements, if any [***903] there be, were not made borrower for the improvement". 1 The statement by it, but by the borrower on its own behalf and that indicated that the consideration and the sum available section 22 does not require that a lender guarantee the were each $ 108,000. It also [*246] represented that all accuracy of statements for the filing of which it was only expenses connected with the loan were to be "paid by a conduit. borrower". 2 The contractors even suggest, though 1 The relevant portions of section 22 read: "A somewhat imprecisely, that part of the loan to the building loan contract either with or without the knowledge of the bank was to be applied in sale of land, and any modification thereof, must satisfaction of a prior lien. be in writing and duly acknowledged, and must contain a true statement under oath, verified by These contentions having been tested on cross the borrower, showing the consideration paid, or motions for summary judgment, Special Term, citing to be paid, for the loan described therein, and HNC Realty Co. v Golan Hgts. Developers (79 Misc 2d showing all other expenses, if any, incurred, or to 696), held that the mortgage of a lender knowingly filing be incurred in connection therewith, and the net a materially false building loan statement is subordinated sum available to the borrower for the to subsequent mechanics' liens. It then proceeded to deny improvement, and, on or before the date of the motions on the ground that whether the statement was recording the building loan mortgage made materially false and whether the bank had knowledge pursuant thereto, to be filed in the office of the thereof were disputed questions of fact. The Appellate clerk of the county in which any part of the land is Division, Second Department, in unanimously affirming, situated * * *. If not so filed the interest of each expressly rejected the contrary holding of the Third party to such contract in the real property affected Department in Ulster Sav. Bank v Total Communities (55 thereby, is subject to the lien and claim of a AD2d 278). For the reasons which follow we uphold the person who shall thereafter file a notice of lien determination before us now. under this chapter." At the outset, we acknowledge that section 22 It was in the face of record notice of the bank's lien provides no [*247] explicit answer to the dilemma that respondents Token Carpentry, [**985] Inc., and which confronted the courts below. True, [HN2] the Leon's Plumbing & Heating, Inc., performed work and statute tells us that information as to the consideration for supplied materials for which they qualified as mechanics' the loan, the related expenses, and the net amount lienors on the property. The Token and Leon liens were available to the borrower must be filed and that "[if] not duly filed. Perforce, subject to the challenge mounted by so filed the interest of each party to such contract in the the contractors in this case, their liens, at least pro forma, real property affected thereby is subject to [subsequent were junior to that of the bank. mechanics'] [liens]". But it does not specify whether these consequences are to be visited on a lender that does The parties' rights started on their collision course file when it turns out that the information filed is when the borrower defaulted in its obligations to the inaccurate. In the face of legislative silence, we therefore bank. There ensued this foreclosure action, in which the must determine whether the words "so filed" refer not borrower as well as the mechanics' lienors were named as merely to the mechanics of the filing but also to the defendants. The borrower did not contest the suit, but the integrity of what is filed (see Becker v Huss Co., 43 contractors contended, in essence, that misstatements in NY2d 527, 541). the bank's filing rendered its interest subordinate rather than superior to their own liens. Specifically, they point [HN3] The intent of the legislators, if ascertainable, is a particularly important guide to our construction. Page 5 47 N.Y.2d 243, *247; 391 N.E.2d 983, **985; 417 N.Y.S.2d 901, ***903; 1979 N.Y. LEXIS 2065

Turning for that purpose to the legislative history of [***904] interpretation of the statute is that which section 22, we first note that the language at issue had its subjects the bank's interest to the subordination penalty if genesis in the economic malaise that prevailed at the end it knowingly files a materially false statement. of the 1920's and into the early 1930's. The unusually Obviously, since a false filing is a snare for the unwary heavy losses which "materialmen, supplymen and contractor no matter who is responsible for the laborers" then suffered motivated the Legislature to take misleading information, a balanced analysis must focus action which was thought likely to eradicate its root on optimizing the likelihood that deception will not causes (see Report of the Joint Legislative Committee occur. The threat of a loss of priority is an effective Investigating the Lien Law, Legislative Document No. 32 deterrent to a lender's indifference to the truthfulness of [1930]; see, also, Blanc, Mechanics' Liens, par 46; cf. P. its client's statement; in contrast, the borrower has no T. McDermott, Inc. v Lawyers Mtge. Co., 232 NY 336, priority to lose. Without attempting to further define the 341-342 [discussing preamendment purpose of statute]). limits of the bank's obligation, there should be no doubt Section 22 was amended to readily enable a contractor to that it cannot with impunity file a statement it knows is learn exactly what sum the loan in fact made available to inaccurate. In short, the bank's role is a responsible one. the owner of the real estate for the project (see Hearings It is neither perfunctory nor ministerial. of the Joint Legislative Committee, p 1209 [1930]). And subdivision (3) of section 13 of the Lien Law was The rule we announce is also consonant with a amended to strengthen [**986] the statutory provisions realistic awareness of the usual interplay among bank, under which such funds were deemed to be held in trust. borrower and materialman in the building loan context. 3 The bank's position is pivotal; without its financial support, contractors might be unwilling to risk their 3 [HN4] Relevant portions of this subdivision resources in a project run by a developer of perhaps read: "(3) Every such building loan mortgage and questionable soundness. Frequently the bank is a every mortgage recorded subsequent to the working partner in the deal in that it co-ordinates its commencement of the improvement and before advances to the developer with the actual progress of the the expiration of four months after the completion construction; at times, it may even bargain for an option of the improvement shall contain a covenant by to convert its mortgage into an equity interest. The the mortgagor that he will receive the advances mechanics' lienor, on the other hand, is likely to find secured thereby and will hold the right to receive itself in a dependent stance; it must rely not only on the such advances as a trust fund to be applied first truth of the filed statement that shows how much of the for the purpose of paying the cost of bank's capital is behind the job but also on the periodic improvement, and that he will apply the same first advances which it promises. Our decision also pays heed to the payment of the cost of improvement before to the practical consideration that, in many of the cases in using any part of the total of the same for any which the question of priority arises, the materialman will other purpose, provided, however, that if the party have no other recourse because the owner is bankrupt executing the building loan contract is not the (see, generally, Vitt & Bernstein, Convertible Mortgages: owner of the fee but is the party to whom such New Financing Tool, Real Estate Review, Spring, 1976, advances are to be made, a building loan contract at p 33; Practicing Law Institute, Real Estate executed and filed pursuant to section twenty-two Development & Construction Financing Handbook of this chapter shall contain the said covenant by [1968], § 5; Marks, Maloney & Paperno, Mortgages and such party executing such building loan contract, Mortgage Foreclosure in New York [rev ed, 1975], §§ in place of the covenant by the mortgagor in the 141-143). 4 building loan mortgage as hereinbefore provided. Nothing in this subdivision shall be considered as 4 Although the record does not reveal the imposing upon the lender any obligation to see to borrower's financial condition, as noted, it has not the proper application of such advances by the appeared to defend in this action. owner". [*249] The vital and material parts which lenders [*248] Consistent with this overriding legislative tend to play in such transactions are hardly objective, we believe [HN5] the more reasonable disproportionate to the obligations we have described. Page 6 47 N.Y.2d 243, *249; 391 N.E.2d 983, **986; 417 N.Y.S.2d 901, ***904; 1979 N.Y. LEXIS 2065

After all, the effort required for compliance is modest. [HN6] the Lien Law's broader mandate that its provisions Not only does a lender usually operate from a bargaining "be construed liberally to secure [their] beneficial position strong enough to demand accurate information interests and purposes" (Lien Law, § 23; see, also, from the borrower, but the limited nature of the details Jensen, Mechanics' Lien Law [4th ed],§ 84). This adds required to be filed suggests they would in any event be further support to our conviction that, in harmony with within the lender's ken. the over-all motivation for the statutory enactments, the answer we have found is the very one the Legislature Consistent with our view, we, of course, cannot would have given had it addressed the precise point at accept the theory advanced in the present case by the issue in this case (Gray, Nature and Sources of Law, pp bank, that a contrary intent is to be divined from the 172-173, cited with approval as to trusts and conveyances proviso that lenders not be responsible for how borrowers as well in 2 Scott, Trusts, § 164.1, and in 3 Restatement, later apply the funds loaned (see Lien Law, § 13, subd Property, § 241, Comment c, respectively). [3]). The duties we have articulated do not anticipate supervision of the construction project. [***905] For all these reasons, the question certified must be answered in the affirmative and the [**987] Finally, we observe that, though no express order of the Appellate Division affirmed. provision in the statute ineluctably compels the construction we have adopted, it also comports with Exhibit DD: HNC Realty Co.v. Golan Heights Developers, 360 N.Y.S 2d 954 Page 1

1 of 51 DOCUMENTS

HNC Realty Company, Doing Business as HNC Realty Company, Inc., Plaintiff, v. Golan Heights Developers, Inc., et al., Defendants

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Rockland County

79 Misc. 2d 696; 360 N.Y.S.2d 954; 1974 N.Y. Misc. LEXIS 1736

October 25, 1974

CASE SUMMARY: property, including interests obtained through acquisition by assignment of prior mortgages which were later consolidated with the building loan mortgage. PROCEDURAL POSTURE: Plaintiff mortgagee filed a motion for summary judgment in connection with its OUTCOME: The court entered a judgment action to foreclose a consolidated real property mortgage subordinating the mortgagee's consolidated mortgage to executed by defendant mortgagor. Defendant companies the companies' mechanics' liens, in the mortgagee's had filed mechanics' liens on lots encumbered by the foreclosure action against the mortgagor. mortgage. CORE TERMS: building loan mortgage, borrower, OVERVIEW: The mortgagee was assigned mortgages consolidated, lender, mechanics' liens, mortgage, lienors, on properties owned by the mortgagor. The mortgagor subordination, dollars, clerk, foreclosure, recorded, real and mortgagee later entered into a building loan property, property affected, false statement, modification, agreement secured by a building loan mortgage note. verified, expended, spread, realty, encumbered, loan They thereafter consolidated the assigned mortgages and described, notice of lien, consideration paid, failure to the building loan mortgage into one mortgage. When the file, prior mortgages, materially false, subordinated, mortgagor went into arrears, the mortgagee sought subordinate, overstated foreclosure. The companies contended that the consolidated mortgage was subordinate to their LexisNexis(R) Headnotes mechanics' liens because the borrower's affidavit falsely overstated the net sum available to the mortgagor in violation of N.Y. Lien Law § 22. The court held that the consolidated mortgage was subordinate to the mechanics' Governments > Local Governments > Finance liens under § 22. The court held that a lender who filed a Real Property Law > Financing > Construction Loans building loan contract containing a materially false Real Property Law > Financing > Mortgages & Other borrower's statement, which was known by the lender to Security Instruments > Formalities be false at the time of such filing, suffered the [HN1] N.Y. Lien Law § 22 provides in part: a building subordination penalty under § 22. The assigned loan contract and any modification thereof, must be in mortgages were subordinated to the mechanics' liens writing and duly acknowledged, and must contain a true because § 22 applied to the lender's entire interest in the Page 2 79 Misc. 2d 696, *; 360 N.Y.S.2d 954, **; 1974 N.Y. Misc. LEXIS 1736, *** statement under oath, verified by the borrower, showing building loan mortgage itself. the consideration paid, or to be paid, for the loan described therein, and showing all other expenses, if any, HEADNOTES incurred, or to be incurred in connection therewith, and the net sum available to the borrower for the [***1] Mortgages -- building loan mortgage -- in improvement, and, on or before the date of recording the filed building loan mortgage, borrower's affidavit building loan mortgage made pursuant thereto, to be filed overstated "net sum available to the borrower for the in the office of the clerk of the county in which any part improvement" (Lien Law, § 22), by including moneys of the land is situated, except that any subsequent used by lender to buy other mortgages which were modification of any such building loan contract so filed thereupon consolidated and spread with building loan must be filed within 10 days after the execution of any mortgage to form one large mortgage; therefore, such modification. If not so filed the interest of each subsequently filed mechanics' liens are superior to party to such contract in the real property affected such consolidated mortgage. thereby, is subject to the lien and claim of a person who In a filed building and loan contract, the borrower's shall thereafter file a notice of lien. affidavit falsely stated that "the net sum available to the * * * borrower for the improvement is $ 9,585,271.92", Real Property Law > Financing > Mortgages & Other whereas, out of that total, the sum of $ 3,945,442.95 was Security Instruments > General Overview in fact not available "for the improvement" but instead Real Property Law > Nonmortgage Liens > Lien was used by the lender to purchase assignments of Priorities mortgages, which mortgages were thereupon [HN2] A lender who files a building loan contract consolidated and spread of record with the recorded $ containing a materially false borrower's statement, which 5,704,557.05 building loan mortgage so as to form one is known by the lender to be false at the time of such consolidated mortgage of $ 9,650,000. Therefore, filing, must suffer the subordination penalty specified in subsequently filed mechanics' liens are superior in lien to N.Y. Lien Law § 22. the $ 9,650,000 mortgage (Lien Law, § 22; § 2, subd. 14).

COUNSEL: Paul, Weiss, Rifkind, Wharton & Garrison Real Property Law > Financing > Mortgages & Other for plaintiff. Security Instruments > Definitions & Interpretation [HN3] A building loan mortgage is defined by N.Y. Lien Schwartz, Kobb, Scheinert & Hamerman (Donald [***2] Law § 2(14) as a mortgage made pursuant to a building Tirschwell of counsel), for Charles J. Reid, Inc., and loan contract and includes an agreement wherein and another, defendants. whereby a building loan mortgage is consolidated with existing mortgages so as to constitute one lien upon the Donald Tirschwell for Sandy Hill Coal & Supply Co., mortgaged property. and others, defendants.

Shapiro & Reeder for Biaggi Giuttari, defendant. Real Property Law > Financing > Mortgages & Other Security Instruments > Mortgagee's Interests Blecher & Artale, (Donald Tirschwell of counsel), for Real Property Law > Financing > Mortgages & Other Leon's Plumbing & Heating, Inc., defendant. Security Instruments > Transfers > Transfers by Mortgagees JUDGES: Morton B. Silberman, J. Real Property Law > Financing > Secondary Financing > Lien Priorities OPINION BY: SILBERMAN [HN4] When N.Y. Lien Law § 22 speaks of the lender's "interest" in the affected realty being subject to the claims OPINION of subsequent mechanics' lienors, that term is intended to embrace the lender's entire interest, including an interest [*697] [**955] This is an action to foreclose a obtained through acquisition by assignment of prior certain consolidated real property mortgage executed by mortgages, which are thereafter consolidated with the defendant Golan Heights Developers, Inc. (hereinafter Page 3 79 Misc. 2d 696, *697; 360 N.Y.S.2d 954, **955; 1974 N.Y. Misc. LEXIS 1736, ***2

Golan Heights), as mortgagor, in favor of plaintiff building loan mortgage. That mortgage was recorded on hereinafter HNC), as mortgagee. The said mortgage is in January 19, 1973 in the Rockland County Clerk's office. the principal amount of $ 9,650,000, and constitutes a lien upon some 187 building lots, some improved, which (6) On January 17, 1973 HNC and Golan Heights are located in numerous different residential subdivisions entered into an agreement whereby the Assigned in Rockland County. Mortgages (referred to in [1], supra) and the building loan mortgage (referred to in [5], supra were, in HNC's HNC moves: (a) for summary judgment of words, "consolidated, coordinated, modified and spread foreclosure; (b) for the appointment of a referee to so that together they would thereafter constitute in law compute; and (c) for other incidental relief. Several but one first mortgage, a single lien, securing the defendants have opposed the motion. Numerous others principal sum of $ 9,650,000.00 and interest" upon the have entered into stipulations of settlement with HNC, encumbered real property. The foregoing agreement was subsquent to the submission of this motion. Several other recorded on January 19, 1973 in the Rockland County defendants have moved, by separate notices of motion, Clerk's office. [***3] for various types of relief. Each of such motions will be discussed below. (7) On February 13, 1973, the afore-mentioned agreements were modified to embrace two additional BACKGROUND parcels of real property. This agreement was recorded on February 14, 1973 in the Rockland County Clerk's office. The following are the basic facts out of which this foreclosure action arose: HNC alleges that between January 17, 1973 and September 21, 1973 it advanced to Golan Heights $ (1) On January 17, 1973, through a series of 6,761,095.17; that Golan Heights repaid a total of $ assignments, HNC became the owner and holder of 21 [***5] 2,432,524.47; and that the present unpaid mortgages with an aggregate [**956] unpaid principal principal balance due and owing is $ 4,328,570.70. HNC balance of $ 3,945,442.95. Those mortgages constituted further alleges that Golan Heights "fell permanently in liens upon portions of the real property affected by the arrears" in interest payments commencing with June 1, consolidated mortgage sought to be foreclosed herein. 1973. (Interest continues to accrue at the approximate For convenience, these mortgages are hereinafter referred rate of $ 60,000 per month.) Based upon the foregoing, to as the Assigned Mortgages. and other defaults, HNC seeks a judgment of foreclosure.

(2) On January 17, 1973, through a series of [**957] OPPOSITION TO THE MOTION FOR conveyances, Golan Heights became the owner in fee of SUMMARY JUDGMENT the real property encumbered by the aforesaid Assigned Mortgages. Defendants Charles J. Reid, Inc., Cornell & Reid, Inc., Sandy Hill Coal & Supply Company and Leon's (3) On January 17, 1973 HNC and Golan Heights Plumbing & Heating Co., Inc., have filed mechanics' entered into a building loan contract, whereby HNC liens against numerous lots encumbered by the agreed to loan Golan [*698] Heights the sum of $ consolidated HNC mortgage. The aggregate amount 9,650,000, to be advanced in periodic installments. Said allegedly due these defendants is $ 44,145.39. building loan contract was filed in the Rockland County Clerk's office on January 19, 1973. [*699] The answer of the above-named lienors contain denials, affirmative defenses and a counterclaim (4) On January 17, 1973 Golan Heights made and for foreclosure of their respective mechanic's liens. In delivered to HNC a building loan mortgage note in the substance, these lienors contend that HNC's mortgage is amount of $ 5,704,557.05, payable in the manner subordinate to their mechanic's liens by reason of certain specified [***4] therein. Said note is hereinafter referred alleged violations of section 22 of the Lien Law. to as the HNC note. Insofar as relevant hereto, said [HN1] section 22 of (5) On January 17, 1973, to secure repayment of the the Lien Law provides as follows: "A building loan HNC note, Golan Heights executed in HNC's favor a contract * * * and any modification thereof, [***6] must Page 4 79 Misc. 2d 696, *699; 360 N.Y.S.2d 954, **957; 1974 N.Y. Misc. LEXIS 1736, ***6 be in writing and duly acknowledged, and must contain a As originally enacted in 1897 as section 21 of the true statement under oath, verified by the borrower, Lien Law (L. 1897, ch. 418), and amended in 1909 (L. showing the consideration paid, or to be paid, for the 1909, ch. 38), section 22 of the Lien Law required only loan described therein, and showing all other expenses, if that a building loan contract be in writing, acknowledged any, incurred, or to be incurred in connection therewith, and filed; and, like the statute in its present form, and the net sum available to the borrower for the imposed the penalty of subordination of the mortgagee's improvement, and, on or before the date of recording the lien when the building loan contract was "not so filed." building loan mortgage made pursuant thereto, to be filed The requirement that such filed contracts also contain a in the office of the clerk of the county in which any part verified borrower's statement was added to section 22 in of the land is situated, except that any subsequent 1930 (L. 1930, ch. 859, § 14). modification of any such building loan contract so filed must be filed within ten days after the execution of any Prior to the addition of the borrower's statement such modification. * * * If not so filed the interest of each requirement, section 22 was regarded as having been party to such contract in the real property affected intended simply "to acquaint prospective contractors with thereby, is subject to the lien and claim of a person who the fact that they furnish labor and materials subject to shall thereafter file a notice of lien under this chapter." claims prior to theirs against the property". ( McDermott (Emphasis added.) v. Lawyers Mtge. Co., 232 N. Y. 336, 341.) Thus viewed, in its pre-1930 form, section 22 did not require a building The lienors allege that section 22 was violated, loan contract to contain any provision "for the disposition because the borrower's affidavit filed herein, among other of the proceeds of the loan". ( Pennsylvania Steel Co. v. things, falsely stated that "the net sum available to the * * Title Guar. & Trust Co., 193 N. Y. [***9] 37, 42.) * borrower for the improvement is $ 9,585,271.92"; Consequently, the subordination penalty could not be whereas, in fact, the sum of $ 3,945,442.95 [***7] was invoked when prior mortgages were satisfied out of the deducted from the foregoing sum and used to acquire the proceeds realized from a building loan, and that fact was Assigned Mortgages and, therefore, was not available to not disclosed in the filed building loan contract (see, e.g., the borrower for the improvement. Pennsylvania Steel Co. v. Title Guar. & Trust Co., supra; Summers Lbr. & Supply Corp. v. Barbara Constr. Corp., The aforesaid sum of $ 3,945,442.95 expended to 255 N. Y. 525). acquire the Assigned Mortgages obviously accounts for the difference between the sum to be advanced according It was thus possible under the pre-1930 version of to the terms of the building loan contract (i.e., $ section 22, where a building loan contract had been filed, 9,650,000) and the principal amount of the HNC building for materialmen to be misled into believing that greater loan mortgage (i.e., $ 5,704,557.05). Thus, there is no sums were available to the borrower for the improvement question or dispute but that HNC knew at the time the than actually were. The 1930 amendment was obviously borrower's [**958] affidavit was executed that only 5.7 designed to overcome that deficiency in the statute. As million dollars would actually be available to the previously stated, the 1930 amendment (L. 1930, ch. 859, borrower for the improvement, and not 9.5 million dollars § 14) required every filed building loan contract to as represented in the borrower's affidavit. contain "a true statement under oath, verified by the borrower, showing the consideration paid, or to be paid, HNC does not deny knowledge of the foregoing, but for the loan described therein, and showing all other contends: (a) that section 22 of the Lien Law was not expenses, if any, incurred, or to be incurred in connection violated thereby; (b) that even if there was a violation of therewith, and the net sum available to the borrower for section 22, the penalty of subordination flows only from a the improvement". failure to file a building loan [*700] contract, and not from a mere filing of a defective borrower's affidavit; and [**959] HNC's contention that the subordination (c) that even if its consolidated building loan mortgage is penalty flows only from [***10] a complete failure to subordinated by operation of section 22, the lien of file a building loan contract, but not from the filing of a [***8] the Assigned Mortgages remains unimpaired and building loan contract containing a materially [*701] superior to defendant's subsequently filed mechanic's false borrower's statement, is not supported by the case, liens. law. It also ignores and defeats the salutary purpose of Page 5 79 Misc. 2d 696, *701; 360 N.Y.S.2d 954, **959; 1974 N.Y. Misc. LEXIS 1736, ***10 the statute. The potential danger to prospective suppliers borrower's statement, [*702] which is [**960] known of material and labor is just as great when the borrower's by the lender to be false at the time of such filing, must statement grossly overstates the net sum actually suffer the subordination penalty specified in section 22 of available to the borrower for the improvement as when the Lien Law. the building loan contract is not filed at all. The false statement in the borrower's affidavit herein Prudential Ins. Co. of Amer. v. Songood Realty (N. was most material and substantial. The net sum available Y. L. J., Feb. 21, 1939, p. 835, col. 7), upon which HNC to the borrower for the improvement was overstated by places principal reliance, is immediately distinguishable some 3.9 million dollars. The borrower's statement was from the present case. The borrower in Prudential used a prepared from a printed form which contained a space for $ 150,000 building loan advance to satisfy pre-existing insertion of the amount of "Sums paid to take by liens against the mortgaged premises. However, the assignment prior existing mortgages which are lender in Prudential, unlike HNC, had absolutely no consolidated with building loan mortgages". That space knowledge that the proceeds were to be used by the was left blank, indicating that no sums were expended for borrower for such purposes. Moreover, in Prudential no such purposes; whereas, in fact some 3.9 million dollars claim was advanced concerning the filing of a false were expended for just that purpose. In addition, the borrower's statement. The sole ground upon which the borrower's affidavit contains the express false statement defendant lienors in Prudential assailed the payments that "the net sum available to the borrower [***13] for [***11] in question was that same were made with the the improvement is $ 9,585,271.92". In fact, only 5.7 knowledge and consent of the lender and in contravention million dollars was actually available. Whether or not the of the "trust fund" provisions of the Lien Law and of the defendant mechanics' lienors actually relied upon the building loan contract. Thus, the issue before the court in false statements is immaterial (see McDermott v. Lawyers the present case was neither raised nor decided in Mtge. Co., 232 N. Y. 336, supra; Sohmer v. Gedney Prudential. Hills, 8 A D 2d 959).

Pennsylvania Steel Co. v. Title Guar. & Trust Co. The only remaining question concerns HNC's (193 N. Y. 37, supra), also relied upon by HNC, was contention that even if its building loan mortgage is decided in 1908, long before the addition to section 22 of subordinated by operation of section 22 of the Lien Law, the Lien Law of the requirement that a borrower's the lien of the Assigned Mortgages is unaffected thereby statement be filed with a building loan contract. In fact, and remains superior to defendants' subsequently filed it was conceded in Pennsylvania Steel (p. 42) that under mechanic's liens. HNC has made a compelling argument section 22, as it then existed, "' a building loan agreement in support of such contention. However, in the court's need not provide for the disposition of the proceeds of the opinion, the result urged by HNC is precluded by the loan'" (emphasis in original). language of section 22.

Summers Lbr. & Supply Corp. v. Barbara Constr. The penalty for violation of section 22 is stated in Corp. (255 N. Y. 525, supra), which is also cited by that section as follows: "The interest of each party to such HNC, was apparently decided upon facts which occurred [building loan] contract in the real property affected prior to the 1930 amendment to section 22 and, in any thereby, is subject to the lien and claim of a person who event, did not involve the issue of a false borrower's shall thereafter file a notice of lien under this chapter." statement. [HN3] A building loan mortgage is defined by Finally, in West Side Fed. Sav. & Loan Assn. v. subdivision 14 of section 2 of the Lien Law as "a Amato Realty Corp. (N. Y. L. J., Jan. 2, 1943, p. 8, col. mortgage made pursuant to a building loan contract 7), also [***12] relied upon by HNC, a $ 200 payment in [***14] and includes an agreement wherein and whereby satisfaction of a pre-existing lien was challenged as an a building loan mortgage is consolidated with existing improper "preferential" payment. No claim was mortgages so as to constitute one lien upon the advanced that a false borrower's statement had been filed. mortgaged property."

The court concludes that [HN2] a lender who files a Therefore, it must be assumed that, [HN4] when building loan contract containing a materially false section 22 speaks of the lender's "interest" in the affected Page 6 79 Misc. 2d 696, *702; 360 N.Y.S.2d 954, **960; 1974 N.Y. Misc. LEXIS 1736, ***14 realty being subject to the claims of subsequent observed in McDermott v. Lawyers Mtge. Co. (232 N. Y. mechanic's lienors, that term was intended to embrace the 336, 348, supra), a lender who violates section 22 "must lender's entire interest, including an interest obtained suffer the consequences." through acquisition by assignment of prior [*703] mortgages, which are thereafter consolidated with the The court, therefore, concludes that HNC's building loan mortgage itself. consolidated mortgage, which is sought to be foreclosed herein, is subordinate, by operation of section [***15] 22 If the foregoing seems harsh, and it is, it must be of the Lien Law, to the mechanics' liens of defendants understood that we are here dealing not with equitable Charles J. Reid, Inc., Cornell & Reid, Inc., Sandy Hill redress, but with a statutorily imposed penalty. That Coal & Supply Company and Leon's Plumbing & penalty was deemed necessary by the Legislature Heating Co., Inc. [**961] to vindicate the strong public policy upon which section 22 is founded. As the Court of Appeals tersely (Balance of opinion omitted from publication.) Exhibit EE: Security National Bank v. Village Mall at Hillcrest, 382 N.Y.S. 2d 882 Page 1

21 of 51 DOCUMENTS

Security National Bank, Plaintiff, v. Village Mall at Hillcrest, Inc., et al., Defendants

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Special Term, Queens County

85 Misc. 2d 771; 382 N.Y.S.2d 882; 1976 N.Y. Misc. LEXIS 2057

March 26, 1976

CASE SUMMARY: lender's lien was subordinate to those of the mechanic's lienors, the court reasoned that the collective effect of the modifications required a filing that did not occur. PROCEDURAL POSTURE: Plaintiff lead lender filed a foreclosure action against defendant mortgagor, OUTCOME: The court granted various defendants' personal guarantors, mechanic's lienors, corporations, and motions for summary judgment in part, granted the occupants of buildings. Defendant mechanic's lienors and mechanic's lienor's motion to amend its answer, granted a the Attorney General for the People of the State of New defendant's motion for the appointment of a receiver in York filed answers. Various defendants filed motions for part, denied the Attorney General's motion for summary summary judgment. One defendant mechanic's lienor judgment, and denied all other pending motions. filed for leave to amend its answer, and another filed for the appointment of a receiver. CORE TERMS: modification, building loan, lienor, mechanic's, mortgage, lender, receiver, summary OVERVIEW: The lead lender provided a $ 16,000,000 judgment, borrower, vendee, condominium, contractor, loan for the construction of residential buildings and movant, mechanic's liens, commercial building, county condominiums. The lead lender filed to foreclose on the clerk's office, condominium units, affirmative defenses, loan against the mortgagor, personal guarantors, equitable, conveyed, common charges, residential, mechanic's lienors, corporations, and occupants of apartment, managers, notice, rental, realty, Lien Law, buildings. The state attorney general filed an answer on subordinate, materialman behalf of the buildings' occupants, and various mechanic's lienors filed answers as well. The other LexisNexis(R) Headnotes parties filed various motions, including summary judgment motions, motions for leave to amend an answer previously filed, and a motion for the appointment of a receiver. The court held that the lien of the contract Commercial Law (UCC) > Secured Transactions vendees were not superior to those of the mechanic's (Article 9) > Priority > General Overview lienors. In interpreting the N.Y. Lien Law, the court also Contracts Law > Secured Transactions > Perfection & held that where an essential term of a building loan Priority > Priority > Liens > Mechanics' Liens contract was changed, a modification must be filed. Estate, Gift & Trust Law > Trusts > Beneficiaries > Examples cited by the court of essential terms were the General Overview amount or manner of payment. In holding that the lead Page 2 85 Misc. 2d 771, *; 382 N.Y.S.2d 882, **; 1976 N.Y. Misc. LEXIS 2057, ***

[HN1] N.Y. Lien Law § 71-a provides that a mechanic's the detriment of those for whom that section was enacted lienor trust fund beneficiary is superior to that of a by providing that no change in the agreement shall be contract vendee. The claim of the beneficiary of a lien deemed a modification. law trust is junior to that of one holding a mechanic's lien resulting from the same construction project. Civil Procedure > Equity > Relief [HN7] Once equity is invoked the court may do equity as Contracts Law > Contract Modifications > General to all parties and for complete relief. Overview Real Property Law > Financing > Construction Loans [HN2] See N.Y. Lien Law § 22. Commercial Law (UCC) > Secured Transactions (Article 9) > Priority > General Overview Contracts Law > Secured Transactions > Perfection & Contracts Law > Contract Modifications > General Priority > Priority > Liens > Mechanics' Liens Overview [HN8] See N.Y. Lien Law § 13(1). [HN3] Even though the N.Y. Lien Law provides that any subsequent modification of any such building loan contract must be filed, not every change in the building Commercial Law (UCC) > Secured Transactions loan contract rises to the status of a modification. (Article 9) > Priority > General Overview Contracts Law > Secured Transactions > Perfection & Priority > Priority > Liens > Mechanics' Liens Contracts Law > Contract Modifications > General [HN9] N.Y. Lien Law § 56 states that a laborer, Overview subcontractor, or materialman is prior to the person for Real Property Law > Financing > Construction Loans whom he performed the labor or furnished materials. [HN4] Where an essential term of the building loan contract is changed, such as the amount or manner of payment, a modification must be filed. Those terms Real Property Law > Financing > Mortgages & Other which are required to be stated in the building loan Security Instruments > Transfers > Assumptions contract by virtue of the terms of N.Y. Lien Law § 22 Real Property Law > Nonmortgage Liens > Lien should also be deemed material when dealing with Priorities modifications. The terms listed in § 22 are the Tax Law > State & Local Taxes > Administration & consideration paid or to be paid for the loan, the Proceedings > Tax Liens expenses, if any, to be incurred in connection therewith, [HN10] Avoidance of a multiplicity of actions in and the net sum available to the borrower for the circumstances where there is a community of interest in improvement. Any modification dealing with these the subject matter and in the questions of law and fact matters is, as a matter of law, to be considered essential. involved in the general controversy are grounds for assumption of jurisdiction by equity.

Commercial Law (UCC) > Secured Transactions (Article 9) > Perfection > Methods > Filings > General Commercial Law (UCC) > Secured Transactions Overview (Article 9) > Perfection > Methods > Filings > General [HN5] The statutory requirement of filing pursuant to Overview N.Y. Lien Law § 22 is absolute, and a lienor's knowledge Real Property Law > Nonmortgage Liens > Lien of the agreement is not a substitute for the filing. Priorities Real Property Law > Nonmortgage Liens > Mechanics' Liens Contracts Law > Contract Modifications > General [HN11] N.Y. Real Prop. Law § 339-aa states that the lien Overview provided for in N.Y. Real Prop. Law § 339-z shall be Estate, Gift & Trust Law > Trusts > General Overview effective from and after the filing in the office of the Real Property Law > Financing > Construction Loans recording officer. [HN6] Two parties to a building loan contract cannot agree to abrogate the provisions of N.Y. Lien Law § 22 to HEADNOTES Page 3 85 Misc. 2d 771, *; 382 N.Y.S.2d 882, **; 1976 N.Y. Misc. LEXIS 2057, ***

[***1] Mortgages -- modification of building comply with the statute, the interest in the real property loan agreement -- subordination of mortgage lien to of each party to the agreement is subjected to the lien and subsequent mechanic's liens -- mortgage lien of claim of the materialman thereafter filing his notice of plaintiff, lead lender on $ 16,000,000 construction loan lien. The conversion of the residential apartments from covering two residential apartment buildings and rental to individual condominium units was a substantial commercial building, is subordinate to that of modification which should have been filed in the county mechanic's lienors since plaintiff failed to file two clerk's office. The modification substantially diluted the substantive modifications of building loan contract in security upon which the mechanic's lienors were entitled county clerk's office (Lien Law, § 22); conversion of to rely in the making of their business decisions residential apartments from rental to individual concerning extension of credit to the builder. The res to condominium units was substantial modification which their liens would attach that stood to safeguard affecting security of mechanic's lienors which should their interest was depleted by 62%, representing the have been filed -- modification of retainage agreement approximate percentage of the value of the improvement for final advance from 10% to 5%, reducing by $ that could not be reached by their liens because such 800,000 amount of money which mechanic's lienors amount had been conveyed to 285 individual could reasonably have expected to be available at condominium unit fee owners. completion of project, was also substantial and material change which could have been detrimental to 2. In addition, the modification of the schedule of contractors and which therefore should have been payments provision of the original building loan contract filed -- Attorney-General may assert affirmative should have been duly filed. The contract set out defenses based on violations of full disclosure conditions [***4] precedent to the final advance, "which provisions relating to condominiums (General shall not be less than 10% of the loan", including delivery Business Law, § 352-e; Real Property Law, § 339-ee). of a survey showing the completed improvement, a permanent certificate of occupancy, a board of fire 1. Plaintiff is the lead lender on a $ [***2] underwriters certificate, and purchase of the loan by a 16,000,000 construction loan secured by a consolidated new permanent lender. Plaintiff agreed to reduce the 10% mortgage on property originally consisting of residential retainage to 5%, even though all the conditions precedent rental apartments, a parking area and a commercial had not been met. The modification of the retainage building. A modification of the building loan mortgage agreement reduced by $ 800,000 the amount of money permitted the owner mortgagor to convert the two which the mechanic's lienors could reasonably have residential buildings into condominiums. Of the 458 expected to be available at the completion of the project. condominium units which have been constructed, 285 This is a substantial and material change which could have been conveyed and 46 have been placed under have been detrimental to the contractors and should contract but not closed. The unrefunded down payments therefore have been filed. on these units aggregate $ 165,000. Subsequent to the conveyance of the 285 units, mechanic's liens totaling $ 3. Although the State was only made defendant to 2,500,000 were filed against the property. In this action bar it from collecting any unpaid corporate franchise to foreclose the consolidated building loan mortgage, taxes due, the Attorney-General may properly assert plaintiff's mortgage lien is subordinate to that of the affirmative defenses based upon plaintiff's alleged mechanic's lienors since plaintiff failed to file two violation of the full disclosure provision relating to public subsequent substantive modifications of the building loan offerings of co-operative interests in realty (General contract in the county clerk's office as required by section Business Law, § 352-e) as it applies to condominiums 22 of the Lien Law. Section 22 is a safeguard against (Real Property Law, § 339-ee). The Attorney-General secret arrangements between lender and owner or has standing to assert claims on behalf of the [***5] contractor. It requires that all building loan contracts and contract vendees, concerning the unrefunded down any modifications thereof be filed. The object is to payments, on behalf of the occupants of the conveyed acquaint prospective contractors with the exact amount condominium units who are liable for the common [***3] of money to be advanced, the purposes to which charges attributable to the common elements of the it is to be applied and the times when or the stages at property involved because of the lack of revenue from the which advances are to be made. In the event of failure to unconveyed units, and the public at large. However, the Page 4 85 Misc. 2d 771, *; 382 N.Y.S.2d 882, **; 1976 N.Y. Misc. LEXIS 2057, ***5 question of whether the claims of the contract vendees mechanic's liens totaling approximately $ 2,500,000 were against the mortgaged property are superior to that of filed against the property. plaintiff may not be summarily determined. Approximately 56 defendants have been named COUNSEL: Shea Gould Climenko Kramer & Casey for consisting of: Village [***7] Mall at Hillcrest, Inc., the plaintiff. mortgagor, which is the owner sponsor of the residential buildings, four individual personal guarantors, the Weisman, Celler, Spett, Modlin & Wertherime; mechanic's lienors, Hillcrest Management Corp., Inc., Greenberg, Trayman, Harris, Cantor, Reiss & Balsky; being the management agent designated in the Sacks & Bernstein; Donald J. Zimmer; Golenbock & condominium offering, the Board of Managers of Village Barell; Otterbourg, Steindler, Houston & Rosen, P. C.; Mall at Hillcrest Condominium, managers of the Young, Sonnenfeld & Busner; Leon D. Mitrany; Altieri, condominium, and Village Mall Terrace, Inc., a Kushner & Miuccio; Hynes & Diamond; Donald corporation to which the commercial noncondominium Tirschwell; Goetz & Fitzpatrick, P. C.; Taback & building was conveyed by the mortgagor. In addition, 200 Hyams; Baron & Baron; Weiss Rosenthal Heller & "John Doe" defendants, who claim or may claim by Schwartzman; Finley, Kumble, Heine, Underberg & virtue of having supplied materials, labor or other Grutman; Friedland & Masone; Louis J. Lefkowitz, services, and 500 "Richard Roe" defendants, having or Attorney-General; Amen Weisman & Butler; for claiming an interest in the mortgaged premises by virtue defendants. of being tenants or occupants, were named.

JUDGES: Angelo Graci, J. Answers in which various affirmative defenses, counterclaims and cross claims are asserted have been OPINION BY: GRACI served by 15 mechanic's lienors, and the Attorney-General for the People of the State of New OPINION York. Except for these, no other defendants have answered. [*772] [**885] This is an action to foreclose a consolidated building [***6] loan mortgage on real A temporary receiver was appointed for the premises property located in this county. The plaintiff is the lead not under control of the board of managers, but with no lender on a $ 16,000,000 construction loan, secured by a power to sell. A motion by the receiver to borrow $ consolidated mortgage dated June 28, 1972. As 125,000 for alleged emergency repairs [***8] was originally planned, the property was to consist of denied on the basis that such repairs were the residential rental apartments, a parking area and a responsibility of the board of managers. commercial building. The defendant, Simpson Electric Corp., one of the The commercial building, although part of the mechanic's lienors, moves for summary judgment on the premises secured by the mortgage, [**886] was built ground that its mechanic's lien is prior to the lien of the with funds other than those advanced by the plaintiff. A plaintiff and that certain of the moneys paid back to the modification of the building loan mortgage, dated plaintiff on its loan be paid into court and held in trust for January 14, 1974, permitted the owner [*773] itself and others. The mechanic's lienor, National Wall mortgagor to convert the two residential buildings into Systems, moves by separate notice, and mechanic's lienor condominiums. defendants, World Carpets of N. Y. and A. Wachsberger Roofing & Sheet Metal Works, Inc., [*774] cross-move The project has been substantially completed. Of the for similar relief. Mechanic's lienor, Dic-Underhill, a 458 condominium units which have been constructed, joint venture, cross-moves for similar relief and for leave approximately 285 have been conveyed, and to serve an amended answer. approximately 46 have been placed under contract but not closed. The unrefunded down payments on these units The Attorney-General moves by separate notice for aggregate approximately $ 165,000. Title to the units summary judgment declaring that the plaintiff be denied conveyed is not directly affected by this action. its lien priority under the building loan contract and that Subsequent to the conveyance of the 285 units, all moneys received by the plaintiff from acts in violation Page 5 85 Misc. 2d 771, *774; 382 N.Y.S.2d 882, **886; 1976 N.Y. Misc. LEXIS 2057, ***8 of article 23-A of the General Business Law be paid into concern for the public at large. court and held in trust for the benefit of the contract vendees. That branch of defendant Dic-Underhill's cross motion for leave to amend its answer to add an In addition, approximately nine other defendant affirmative defense in the form annexed is granted. Said mechanic's lienors have filed affidavits or affirmations defendant may serve the proposed amended answer [***9] with the court supporting to one degree or another within 10 days [***11] after service of the order to be some of the various motions and cross motions without entered hereon. themselves moving for relief. The board of managers, which is in default in this action, has submitted an The motion by the defendant, National Wall affidavit in support of the Attorney-General's motion. Systems, for appointment of a receiver of the rents and profits of the commercial building was based on National Wall Systems, by separate notice, also erroneous information that a receiver had not been moves for appointment of a receiver for the commercial appointed for the commercial building. In fact, under the building on the grounds, inter alia, that the present order of this court entered October 23, 1974, which was receiver's powers do not extend to that property and that modified by the order entered November 29, 1974, a the $ 300,000 bond required before the receiver could receiver had been appointed for all property not enter office has never been posted. This motion is previously conveyed to individual condominium owners. opposed by the plaintiff who is the original owner sponsor and grantor of the commercial building, by its This receiver is empowered inter alia to lease, present owner and by the receiver. manage and make repairs not in excess of the sum of $ 15,000 and to employ a designated management agent. All motions for summary judgment are opposed by In addition, the parties, together with the receiver, were the plaintiff, who also opposes the appearance and ordered to attempt to reach an agreement as to a plan for assertion of claims by [**887] the Attorney-General on the management of the property pending the behalf of the contract vendees and the public generally, determination of this action as well as for the sale or lease on the grounds that the Attorney-General has no standing of the unsold units subject to court approval. The to do so in the manner pursued, and, further, that he is in receiver filed a $ 300,000 bond on October 30, 1974. default in failing to answer within the prescribed period. The movant in its attorney's reply affidavit The mechanic's lienors contend that the usual acknowledged the appointment of the receiver but priority of the plaintiff bank's [***10] mortgage has been requested that a separate receiver be appointed for the lost because of certain Lien Law violations by the bank commercial building, since under sections 13 [***12] that subordinates it to the liens of those who provided and 22 of the Lien Law the ultimate interests in the labor and material in creating the improvements on the commercial property might be different from those of the land. remaining property. The court finds this to be insufficient reason to discharge the original receiver and The Attorney-General contends that the plaintiff appoint a new and separate receiver for the commercial bank has, among other statutes, violated the full property. It would seem advisable, however, for the disclosure provision of section 352-e of the General receiver to maintain separate accounts for the two Business Law relating to public offerings of co-operative parcels. Accordingly, the property subject to the power interests in realty, insofar as it applies to condominiums of the receiver shall be administered by him as two (Real Property Law, § 339-ee), thereby misleading and separate entities consisting of: (1) the commercial deceiving the public and violating plaintiff's duty to the building; and (2) balance of property. All assets of People of the State of New York. The Attorney-General personalty deriving therefrom shall be kept apart and not [*775] is concerned with the unrefunded down payments commingled without permission of the court, and by the contract vendees to whom title has not been separate records of [*776] specific receipts and conveyed, the occupants of the conveyed condominium expenditures of receivership funds shall be maintained. units who are liable for the common charges attributable This motion is granted to that extent only and is in all to the common elements of the property involved because other respects denied. of lack of revenue from the unconveyed units, and Page 6 85 Misc. 2d 771, *776; 382 N.Y.S.2d 882, **887; 1976 N.Y. Misc. LEXIS 2057, ***12

Prior to determination of the motion by the Attorney-General's subsequent service of the answer and Attorney-General for an order denying the plaintiff's lien motion for summary judgment within the time frame set priority and requiring that the plaintiff pay certain by the court was returned by the [***15] plaintiff by moneys into court for the benefit of the contract vendees, letters of December 5 and 9, 1975 as untimely (the it is necessary to dispose of the claim by the plaintiff that answer) and not properly before the court (the motion). the Attorney-General should not be [***13] heard since he was in default in answering the complaint for 11 The court having therefore on December 3, 1975 months and, further, that he cannot assert affirmative granted the Attorney-General's motion for leave to serve defenses because the People have been made defendant an answer will now consider the plaintiff's affidavit dated solely to bar them from any unpaid corporate franchise December 11, 1975 as being in the nature of a motion for [**888] taxes due, to which the affirmative defenses are reargument. not responsive. With regard to the default in answering, the following approximate chronology of events is The court had considered the circumstances of this recited. litigation in which large numbers of families are undergoing varying economic and physical difficulties. The Attorney-General was served during October, These are the deteriorating state of the property, with 1974, appeared November 27, 1974, was served with possible health and safety consequences, as well as its supplemental complaint on January 16, 1975, and did not diminishing value and the necessity of the condominium answer until December 4, 1975. During the intervening owners to bear an extra economic burden by reason of the period, it is not disputed that the Attorney-General unsold units. These circumstances, coupled with the worked diligently with about 40 of the parties in an discussion to follow, caused the court to exercise its attempt to work out a settlement. The plaintiff discretion to extend the time to answer. The plaintiff has participated considerably in these efforts, there being not shown the court that it will be prejudiced ( Corrano v many exchanges of various kinds between the City of New York, 34 AD2d 980). In Bond Stores v Attorney-General and the plaintiff. By October, 1975 Turner (262 App Div 417), an action by an employer settlement attempts were abandoned and motions for against a union, the union failed to answer the complaint summary judgment by some of the mechanic's lienors for more than one year because it became enmeshed in were made. After several adjournments, the motions other court actions [***16] relevant to the case at hand. were heard on December 3, 1975, at which time in open The court allowed the filing of an answer, noting that the court with plaintiff present, the Attorney-General moved defendant's failure to answer was not willful, out of bad for permission [***14] to serve an answer. A reading of faith, or that the plaintiff was not damaged because of the the transcript of December 3, 1975 indicates that though delay and that the defendant's affidavit indicated that it the plaintiff initially took issue with the had a meritorious defense. Attorney-General's application, the main object of the mechanic's lienors present, as well as the plaintiff, was to On the basis of the above, the court on December 3, dissuade the court from adjourning argument on the 1975 granted the Attorney-General's motion for leave to motions for summary judgment pending service of the serve an answer. The plaintiff's request that the court Attorney-General's answer. Because of this, the overrule that decision is denied. plaintiff's counsel finally said that he had no objection to The plaintiff's argument that the Attorney-General giving the Attorney-General time to "put in his papers", was joined only on the issue of corporate franchise taxes to which the parties could file opposing affidavits if and that the affirmative defenses are unrelated is necessary, but thought that that should not necessitate essentially correct. The denials are responsive but the adjournment of argument on the motion. The court affirmative defenses are not connected with the complaint granted the Attorney-General's motion, ordering short as it relates to the People. This is an equitable action, service of the answer and the motion for summary [**889] however, brought on by the plaintiff and is a judgment that the Attorney-General stated he would proper one in which to invoke equitable jurisdiction. The make if his motion for permission [*777] to serve the Attorney-General would have the authority [*778] to answer was granted. The court also adjourned argument litigate against the plaintiff for the alleged violations of on the motions for summary judgment until the date that the Martin Act (General Business Law, § 352-e) referable the Attorney-General's papers were due. However, the to public offerings of interests in realty and other statutes, Page 7 85 Misc. 2d 771, *778; 382 N.Y.S.2d 882, **889; 1976 N.Y. Misc. LEXIS 2057, ***16 in which litigation [***17] the affirmative defenses set of the contract vendees is superior to that of the forth in the Attorney-General's answer would be causes mechanic's lienors. The applicable trust fund statutes of action. Also, the Attorney-General shows every which benefit contract vendees are section 352-h of the disposition that he would so litigate if cut off from this General Business Law and section 71-a of the Lien Law. action. Were this to be done, all parties, including the Under section 352-h of the General Business Law, the plaintiff, would be put to considerable additional expense trust exists until the funds are used for the construction. and delay. The court, in the exercise of its equitable In this case there no longer are such funds in the hands of power, determines that the affirmative defenses of the the seller, the same having been used for construction. Attorney-General may remain in this action. [HN1] Section 71-a of the Lien Law provides that a mechanic's lienor trust fund beneficiary is superior to that The Attorney-General moves for a declaration that of a contract vendee. The claim of the beneficiary of a the contract vendees have a claim to the mortgaged Lien Law trust (contract vendee) is "junior to that of one property superior to the lien of the plaintiff. Nothing is holding a mechanic's lien resulting from the same stated with regard to whether any of the contract vendees construction project." ( Ingalls Ironworks Co. v have litigated any claims they may have, whether any Fehlhaber Corp., 337 F Supp 1085, 1091.) Accordingly, judgments have been rendered thereon, or whether any lis the request by the Attorney-General for a declaration that pendens have been filed by them. The Attorney-General the lien of the contract vendees is superior to that of the grounds his contention as to superiority of position on the mechanic's lienors is denied. basis of 16 alleged violations of section 22 of the Lien Law, which are the same as the bases of the mechanic's The first branch of the mechanic's lienor defendants' lienors' motions for summary judgment, and, in addition, motions [***20] and cross motions for summary on the alleged violations of section 352-e of the General judgment is based on alleged violations by the plaintiff of Business Law, claiming that by the plaintiff's actions it section 22 of the Lien Law which the movants contend [***18] participated in a public offering of securities in subordinate the plaintiff's mortgage lien to their realty without making the required disclosure, on mechanic's liens. violations of the trust fund provisions of section 71-a of the Lien Law and section 352-h of the General Business Section 22 of the Lien Law, entitled "Building loan Law requiring deposit funds coming from contract contract" provides, inter alia: [HN2] [**890] "A vendees to be used solely for the improvement, and on building loan contract either with or without the sale of the claim that plaintiff imposed usurious loan rates in land, and any modification thereof, must be in writing violation of section 5-501 of the General Obligations Law and duly acknowledged, and must contain a true and Federal Reserve Regulation Z (12 CFR Part 226). statement under oath, verified by the borrower, showing the consideration paid, or to be paid, for the loan None of the alleged violations of the Lien Law are described therein, and showing all other expenses, if any, sufficiently established to warrant summary judgment incurred, or to be incurred in connection therewith, and declaring the position of the contract vendees superior to the net sum available to the borrower for the that of the plaintiff. The main consequence of the Lien improvement, and, on or before the date of recording the Law violations cited by the People, i.e., loss of the building loan mortgage made pursuant thereto, to be filed plaintiff's lien superiority, inures to the mechanic's lienors in the office of the clerk of the county in which any part rather than to the contract vendees. The allegation of of the land is situated, except that any subsequent violations by the plaintiff of the General Business Law, modification of any such building loan contract so filed General Obligations Law and other statutes creates must be filed within ten days after the execution of any questions of fact which may not be summarily such modification. No such building loan contract or any determined. The motion by the Attorney-General for a modification thereof shall be filed in the register's office summary declaration that any claims of the contract [***21] of any county. If not so filed the interest of each vendees [*779] against the mortgaged property involved party to such contract in the real property affected are [***19] superior to that of the plaintiff is denied. [*780] thereby, is subject to the lien and claim of a person who shall thereafter file a notice of lien under this Although not raised squarely, the Attorney-General's chapter." (Emphasis supplied.) papers indicate that he also is contending that the position Page 8 85 Misc. 2d 771, *780; 382 N.Y.S.2d 882, **890; 1976 N.Y. Misc. LEXIS 2057, ***21

On many occasions courts have commented on the within the terms of section 22 of the Lien Law. [HN3] purpose which underlies this statute. In P.T. McDermott, Even though the statute provides that "any subsequent Inc. v Lawyers Mtge. Co. (232 NY 336, 341-342), the modification of any such building loan contract" must be court stated "[their] object is to acquaint prospective filed, our courts have long taken the position that not contractors with the fact that they furnish labor and every change in the building loan contract rises to the materials subject to claims prior to theirs against the status of a modification. For example, in Pennsylvania property, so far as advances thereunder are prior to their Steel Co. v Title Guar. & Trust Co. (193 NY 37, 46, liens when filed (Lien Law, § 13), and also to inform supra), the [**891] court found that an oral agreement such contractors of the amounts to be advanced and the that some of the loan proceeds be used to pay off an times of such advances." Similarly, in Rosenblum v existing debt "was in no proper sense a modification of Tilden Improvement Co. (136 App Div 743, 746), the the written agreement between the parties, which was court commented that the following quotation from the filed as required by law" and the court indicated that case of Pennsylvania Steel Co. v Title Guar. & Trust Co. since this oral agreement "related to a mere detail of the (50 Misc 51, 60, affd 120 App Div 879, revd on other execution [***24] of the contract", it would not be grounds 193 NY 37) was a "fair statement of the purpose considered a modification. While the basis of that of the statute". The court in Pennsylvania Steel (50 Misc decision has been changed because section 22 of the Lien 51, 60, supra) stated: "The statute is a safeguard [***22] Law now requires that a borrower's statement be filed against secret arrangements between lender and owner or with a building loan contract (see, also, HNC Realty Co. v contractor. It commands that all agreements or Golan Heights Developers, 79 Misc 2d 696), it is clear modifications thereof be filed. The object is to acquaint that the rule still is that not every change in a building the materialman with the exact amount of money to be loan contract is equivalent to a modification within the advanced, the purposes to which it is to be applied and meaning of the Lien Law. Perhaps the best discussion and the times when or the stages of construction at which definition of when a change in a building loan contract advances are to be made. In the terms of the agreement, becomes a modification which must be filed pursuant to is he to find a guide to his dealings with the owner or section 22 of the Lien Law is contained in the case of contractor. Therefore, the agreement filed should be a New York Sav. Bank v Wendell Apts. (41 Misc 2d 527). true agreement. Nothing should be left to conjecture. This was an action to foreclose a building loan mortgage The materialman is not called upon to inquire beyond the wherein a mechanic's lienor moved for summary actual terms of the filed instrument. The agreement is his judgment claiming that its lien was not subject to the source of information; the statute his protection. In the mortgage because plaintiff failed to file a modification of event of failure to comply with the statute, the interest in its building loan contract pursuant to section 22 of the the real property of each party to the agreement is Lien Law. Plaintiff admittedly failed to file the extension subjected to the lien and claim of the materialman agreement within 10 days after its execution, and the thereafter filing his notice of lien." mechanic's lienor claimed priority over the duly recorded mortgage because of this error. The court [***25] stated Accordingly, in order to effectuate the purpose of the (pp 529-530): "In the situation that arose in this case, a statute, courts have not been reluctant in instances in literal reading of section 22 of the Lien Law would which a building loan contract is not filed pursuant to appear to give a mechanic's lienor a priority actually section 22 of the Lien Law, or where a modification of denied him under section 13 of the same law. This result, the building loan contract is not filed pursuant [***23] to however, only obtains in the event that the extension section 22 of the Lien Law, to make the building loan agreement can be construed as a modification of the contract subordinate to a subsequently filed mechanic's original building loan contract. The agreement merely lien. (See, e.g., P.T. McDermott, Inc. v Lawyers Mtge. extended the date for completion of the project. It did not Co., 232 NY 336, supra.) vary or modify any of the essential terms of the contract with respect to the amount or manner of payment of Having stated the purpose which underlies the advances. Consequently, the [*782] extension statute, the [*781] question now presented is to define accomplished nothing contrary to the purpose for which the term "modification" so that it may be determined section 22 was designed. The latter section is intended as whether or not the changes that were made in the building a safeguard to materialmen against secret arrangements loan contract in the case at bar were "modifications" between the lender and borrower. ( Rosenblum v Tilden Page 9 85 Misc. 2d 771, *782; 382 N.Y.S.2d 882, **891; 1976 N.Y. Misc. LEXIS 2057, ***25

Improvement Co., 136 App. Div. 743.) The object of the office would have revealed in any case, namely, that the statute 'is to acquaint prospective contractors with the fact prior mortgage [***28] had in fact been paid at or about that they furnish labor and materials subject to claims the time the owner of the land acquired the proceeds of prior to theirs against the property, so far as advances the building loan". In the opinion of the court, this thereunder are prior to their liens when filed (Lien Law, § interpretation of the Lien Law clearly is not in the 13), and also to inform such contractors of the amounts to mainstream of the other opinions that have been be advanced [***26] and the times of such advances.' ( analyzed. Accordingly, the court holds that [HN4] where P.T. McDermott, Inc. v Lawyers Mtge. Co., 232 N.Y. an essential term of the building loan contract is changed, 336, 341-342.) Since the extension agreement here left such as the amount or manner of payment, a modification the parties with the same rights and liabilities as existed must be filed. From the face of the statute itself, it can be under the original contract it may not be interpreted as a seen that those terms which are required to be stated in material alteration thereof. No right of any person was the building loan contract by virtue of the terms of enlarged or restricted or impaired by the extension of the section 22 of the Lien Law, should also be deemed completion date, and the agreement of September 5, material when dealing with modifications. The terms 1962, is not a modification of the original loan contract listed in the statute are the consideration paid or to be within the purview of section 22 of the Lien Law. The paid for the loan, the expenses, if any, to be incurred in mortgagee is thus entitled to priority under section 13. connection therewith, and the net sum available to the The motion must be denied, and summary judgment borrower for the improvement. Any modification dealing awarded to the plaintiff." with these matters is, as a matter of law, to be considered essential. Insight into other examples of when a change in a building loan contract is significant enough to be Finally, this court deals with some of the peripheral considered a modification may also be gained from questions of law that are raised. It is well settled that examining some of the cases dealing with the filing of [HN5] the statutory requirement of filing pursuant to building loan contracts which do not comply with section section 22 of the Lien Law is absolute and that a [***29] 22 of the Lien Law. For example, in HNC Realty Co. v lienor's knowledge of the agreement is not a substitute for Golan Heights Developers (79 Misc 2d 696, supra), a the filing. As the court stated in P.T. McDermott, Inc. v lender filed a building loan contract in which he Lawyers Mtge. Co. (232 NY 336, 348, supra): "But, overstated the net sum available to the borrower for the having failed to file the building loan agreement of improvement by $ 3,900,000. The court [***27] held October 13, 1915, the appellant must suffer the that it was proper to subject it to the subordination consequences. Actual knowledge of the agreement is not penalty provided in section 22 because the misstatement a substitute for the filing. 'It does not avoid such liability was a material [**892] defect, stating: "The false to say that the materialman knew of its provisions, statement in the borrower's affidavit herein was most although not filed. The statute absolutely and material and substantial" (p 702). In Ulster Sav. Bank v unconditionally prescribes the penalty which shall follow Total Communities (83 Misc 2d 645), however, the court the failure to file such a paper.' (Hiscock, J., in Packard took a different position. In that case it was held that v. Sugarman, 31 Misc. Rep. 623, 625.) Its mortgages even though a building loan contract filed with the county must be subordinated in point of time exactly as if in fact clerk's office did not disclose the use of $ 63,000 of the the liens came first and its mortgages came second. In mortgage funds to discharge the prior mortgage, there that position it might have protected both itself and the had not been any violation of section 22 of the Lien Law. lienors. It might have discharged the liens and charged The court supported its position by stating (p 648) that the amounts paid for that purpose against the owner of the mechanic's lienor's secured position was not the premises on account of advances." In addition, while "materially affected even if funds which might have been one court [*784] has emphasized that it would apply the used to add further improvements to the real [*783] penalty of section 22 of the Lien Law where the building property were actually used to discharge a lien which is loan contract contained a materially false borrower's admittedly superior to theirs" and that "they have not statement which [***30] is known by the lender to be been prejudiced by any failure to report in the borrower's false at the time of such filing (see HNC Realty Co. v affidavit a transaction that a brief examination of the Golan Heights Developers, 79 Misc 2d 696, supra), no public records on file in the appropriate County Clerk's other court has construed the statute to require that any Page 10 85 Misc. 2d 771, *784; 382 N.Y.S.2d 882, **892; 1976 N.Y. Misc. LEXIS 2057, ***30 errors be the product of knowing falsity. Thus, in Ulster to the lender. Sav. Bank v Total Communities (83 Misc 2d 645, 648, supra), the court stated that although the HNC Realty In the court's opinion at least two of the subsequent case (supra) had indicated that contemporary knowledge agreements between the plaintiff and the property owner of falsity was required, "nothing in the statute justifies constituted substantive modifications which should have disparity of treatment depending upon the lender's been filed in the county clerk's office pursuant to section knowledge or lack of knowledge as to such falsity". In 22 of the Lien Law. The first was the conversion of the the opinion of this court, the terms of the statute and the residential apartments from rental to individual interpretation that has historically been made clearly condominium units on January 14, 1974. Some 18 indicate that there is no requirement that any errors be months after construction had commenced, the plaintiff knowingly made. and the mortgagor executed a modification of the building loan mortgage permitting the mortgagor to [**893] At bar the defendants claim that the "submit the improvements to be constructed on the plaintiff violated the provisions of section 22 of the Lien premises * * * to the provisions of Article 9-B of the Law relating to the filing of the original contract by New York Real Property Law (the Condominium Act)." overstating the net sum of the building loan available to This modification of the mortgage was recorded in the the borrower by $ 1,600,000; omitting the following: $ register's [***33] office but was not filed with the 48,000 interest charges to be paid by the borrower in county clerk nor was a modification of the building loan connection with the assignment of prior existing contract made or filed with the county clerk. mortgages; an $ 80,000 financing [***31] commitment fee to be paid to the lender; a $ 29,000 realty appraisal The plaintiff contends that the amendment in expense; at least $ 32,000 of title examination fees; at question is not a modification of the building loan least $ 40,000 finder's fee for the mortgage commitment; contract in that it does not change the amount of the loan, at least $ 25,000 for real property taxes, assessment, or manner to be advanced, and that since it was recorded water and sewer charges due prior to the commencement in the register's office, it became a public record. The of the improvement and a $ 5,000 fee for the lender's plaintiff further contends that the building loan contract attorney. In addition, it is claimed that the plaintiff incorporates the building loan mortgage by reference and violated the provisions of section 22 of the Lien Law that this should alert prospective lienors to the fact that requiring the filing of modifications by not filing the the register's office should be checked as well as that of following subsequent agreements: an agreement that the the county clerk's office. The latter contention is lender was to reimburse the borrower out of the loan answered by the plain words of section 22 which proceeds the sum of approximately $ 855,000 for provides that "No such building loan contract or any expenditures incurred by the borrower prior to the modification thereof shall be filed at the register's office execution of the building loan contract; that the amount of any county". of the mortgage loan was reduced from $ 16,000,000 to $ 14,400,000; that the parties agreed to convert the rental As to the former contention, correspondence apartments to condominiums; that the lender was contained in the motion papers indicates that the decision permitted to apply $ 470,000 of loan proceeds to to convert to a condominium was the subject of reimburse itself for unsecured commercial loans to the considerable discussion among the loan participants. The borrower; that the sum of $ 1,600,000, which the original borrower needed the lender's consent and both the construction loan agreement required to be held as plaintiff and at least one of the permanent lender retainage, was reduced to $ 800,000; that the lender participants (Alison [***34] Mortgage Investment Trust) [***32] was to hold $ 100,000 in escrow in [*785] showed great concern over their interests as to this connection with the sale of the individual condominium matter. The latter required a "new cost breakdown units; that the lender consented to the borrower's transfer showing [*786] all the direct and indirect costs of such of the property on which the commercial building was conversion and indicating the manner in which such costs erected to another corporation controlled by the are to be financed". [**894] The conversion was a borrower's principals, thereby reducing the amount of major business decision going to the heart of the property to which the mechanic's liens could attach and arrangement between the plaintiff and the borrower. A that additional financing fees of $ 400,000 would be paid reading of the building loan mortgage modification of Page 11 85 Misc. 2d 771, *786; 382 N.Y.S.2d 882, **894; 1976 N.Y. Misc. LEXIS 2057, ***34

January 14, 1974 would indicate the extent to which the plaintiff's lien is subordinate to that of the mechanic's plaintiff was concerned with the conditions of the change. lienors. Choice by the parties of modification of the mortgage as the sole means of effecting this change was apparently The second modification which the court finds sufficient for them, but it did not satisfy the statutory plan material and essential concerns paragraph III of the for apprising parties such as the mechanic's lienor schedule of payments provision of the original building movants that a change had occurred which substantially loan contract which provided that: diluted the security upon which they were entitled to rely in the making of their business decisions concerning "III. The following conditions must be complied with extension of credit to the builder. In fact, the res to as conditions precedent to the final advance, which shall which their liens would attach that stood to safeguard not be less than 10% of the loan: their interest was depleted by approximately 62%, "(A) Delivery of a survey satisfactory to the lender representing the approximate percentage of the value of showing the completed improvement. the [***35] improvement that could not be reached by their liens because such approximate amount had been "(B) A permanent certificate of occupancy. conveyed to approximately 285 individual condominium unit fee owners. "(C) A Board of Fire Underwriters [***37] certificate. The building loan contract though never expressly indicating that the improvement was intended as rental "(D) Compliance with all applicable terms of the housing described it as: "A high-rise apartment complex building loan contract. consisting of two thirteen story buildings containing a total of 498 apartments and 14,400 square feet of "(E) Purchase of the loan by the new permanent commercial space with parking for 575 cars, located in lender referred to in paragraph 38." In approximately the southeast corner of Union Turnpike and 150th Street, March of 1974 the plaintiff consented to reduce the 10% Queens County, New York". The agreement is replete retainage to 5%, even though all conditions set forth in with boiler-plate language suggestive of nothing else but paragraph III had not been met. The plaintiff contends rental. The fact that the building loan contract states that that the building loan contract permits it to accelerate an the lender may release portions of the mortgaged advance prior to becoming due and to waive any premises from the building loan contract and the building provision of the contract without such acceleration or loan mortgage and indicates that such release would not waiver being deemed to be a contract modification. In the constitute an amendment or modification of the opinion of [**895] the court [HN6] two parties to a agreement does not alter the consequence of the failure to building loan contract cannot agree to abrogate the file a modification. The right of the lender to so release is provisions of section 22 of the Lien Law to the detriment not questioned, but such provision does not relieve the of those for whom that section was enacted by providing lender from the necessity of modifying the building loan that no change in the agreement shall be deemed a contract and filing such modification or [***36] modification. (Cf. City Bank Farmers Trust Co. v modification to the building loan mortgage in the Slowmach Realty Corp., supra.) This is particularly the appropriate county clerk's office to reflect so overriding a case where such changes result in a substantial change as a condominium conversion transaction. Nor impairment of the amount of funds available or the value does the language of the parties to the effect that a of the security. The modification of the retainage particular action between them shall not be deemed a agreement reduced by $ 800,000 the amount of money modification of their basic understanding control. (Cf. which the mechanic's lienors could reasonably [***38] City Bank [*787] Farmers Trust Co. v Slowmach Realty have expected to be available at the completion of the Corp., 238 App Div 524.) project. This is a substantial and material change which could well have been detrimental to the contractors and The court finds that the subject matter and magnitude should have been filed. The admitted failure [*788] to of the modification in question satisfies any requirement do so is sufficient to warrant summary judgment that may exist as to the need for materiality and subordinating the plaintiff's lien to that of the mechanic's substantiality and holds as a matter of law that the lienors. Page 12 85 Misc. 2d 771, *788; 382 N.Y.S.2d 882, **895; 1976 N.Y. Misc. LEXIS 2057, ***38

Since either one of the two violations of section 22 any of the parties has been shown which would entitle would be sufficient to warrant the granting of summary any movant to summary judgment. As to all the movants, judgment imposing subordination of the plaintiff's lien to the grounds given by them that could be bases for that of the mechanics, it is not necessary to discuss equitable relief, viz., bad faith, injustice, unfairness, movants' remaining contentions in support of this branch unconscionable conduct, violation of statutes, other than of the motion. the violations of section 22 of the Lien Law involve circumstances replete with triable issues that cannot be The second branch of the motions by Simpson summarily decided. Electric Corp., National Wall Systems and the Attorney-General, and the cross motions by the As to the mechanic's lienor movants, they have not defendants, World Carpets of N.Y., Inc., A. Wachsberger demonstrated that the unconveyed realty units forming a Roofing and Sheet Metal Works, Inc., and Dic-Underhill, considerable portion of the total high-rise premises would a joint venture, pray for an order requiring payment into not be adequate security for their liens. This is court by the plaintiff, to be held in trust for the movants particularly true since, by the [**896] order [***41] to and others, of all moneys received by plaintiff directly or be entered hereon, their liens will be declared superior to indirectly, in whole or in part from acts in violation of the those of the plaintiff as to most of the realty. Those Lien Law and other laws. The plaintiff states that such an branches of the motions and cross motions for payment equitable [***39] remedy is not available to the into court of certain moneys collected by the plaintiff as Attorney-General because, inter alia, the above described are denied. Attorney-General has no standing on this question, nor to the other movants whose standing is only as mechanic's Another issue raised by the moving papers is the lienors, a strictly statutory posture which provides for a counterclaim of National Wall Systems and the claim of specific remedy, such as foreclosing on the res to which Simpson Electric Corp. for lien priority superior to other their liens attach. The cases cited by the plaintiff for this mechanic's lienors. Subdivision (1) of section 13 of the proposition essentially hold that mechanic's liens cannot Lien Law states as follows: [HN8] "Persons shall have no equitably be established where prospective lienors have priority on account of the time of filing their respective not availed themselves of the statutory way to fix liens. ( notices of liens, but all liens shall be on a parity except as Home Fed. Sav. & Loan Assn. v Four Star Heights, 70 hereinafter in section fifty-six of this chapter provided; Misc 2d 118; Billson Housing Corp. v Harrison, 26 Misc and except that in all cases laborers for daily or weekly 2d 675.) They do not, however, bar resort to equitable wages shall have preference over all other claimants power for the enforcement of a statutorily fixed lien if a under this article." [HN9] Section 56 of the Lien Law statutory remedy exists but is insufficient in a given case. states that a laborer, subcontractor, or materialman is In Cerasole v Egenberger (248 App Div 587, affd 273 prior to the person for whom he performed the labor or NY 351) there was an action to foreclose plaintiff's furnished materials. For example, a contractor engaging mechanic's lien and to compel the lienor under a building a subcontractor would be junior to his subcontractor. loan agreement to pay into court an unadvanced balance of the loan for distribution among all the mechanic's In the case at bar the moving mechanic's lienors are lienors on the ground that the lienor induced the either contractors, subcontractors or materialmen. mechanic's lienors to continue working. [***40] The [***42] None have identified themselves as laborers for court compelled payment into court despite availability of wages, nor have any distinguished themselves as being the statutory remedy of foreclosure to the lienors in such within the preferential class of section 56 of the Lien circumstances. Law. They all appear to have been performing directly for Village Mall at Hillcrest, Inc., the owner of the fee. Equitable jurisdiction of this court, having been The mechanic's lienor movants herein are regarded as a invoked by the plaintiff's mortgage foreclosure action, class and the priorities among them are on a parity. may now be extended for the court to hear pleas in equity Accordingly, the counterclaim and claim so asserted by made by the movants. [HN7] Once equity is invoked the these movants to the extent that they maintain superiority court may do equity as to all parties and for complete of lien over the other mechanic's lienors in this action are relief (20 NY Jur, Equity, § 33). [*789] Nevertheless, hereby dismissed. no basis for the aforesaid equitable relief prayed for by [*790] The affidavit in support of the Page 13 85 Misc. 2d 771, *790; 382 N.Y.S.2d 882, **896; 1976 N.Y. Misc. LEXIS 2057, ***42

Attorney-General's motion for summary judgment raises 339-z and 339-aa of the Real Property Law are the issue of responsibility for the common charges concerned, its position is subject to the liens of the applying to the unsold units. Ordinarily, this mechanic's lienors. Whether plaintiff's alleged responsibility would be that of the sponsor, who has now wrongdoings are sufficient to defeat the plaintiff's defaulted. The common charges for the approximately [**897] otherwise undisputed superiority over any lien 177 unsold units which are being foreclosed were, in of the common charges is not determinable summarily. December, 1975, in excess of $ 200,000 and are being Similarly, the contention made by the Attorney-General borne by the 277 unit owners. Though the in his affidavit urging some sharing of the burden of the Attorney-General does not expressly move to subordinate common [*791] charges by the plaintiff cannot be the plaintiff's mortgage to any lien of the common determined by summary judgment. charges, he urges that the plaintiff should at least share [***43] in the burden because, inter alia, it benefits by Settle order and provide therein that those branches any protection received by the unsold units of which it, as of the motions by defendants, Simpson Electric Corp. and foreclosing mortgagee, is the equitable owner. National Wall Systems, for summary judgment and those branches of the cross motions of World Carpets of N.Y., The board of managers of Village Mall at Hillcrest Inc., A. Wachsberger Roofing & [***45] Sheet Metal Condominium which served no answer in response to the Works, Inc. and Dic-Underhill for summary judgment are complaint submitted affidavits in support of the granted to the extent that the mechanic's liens of those Attorney-General's motion and in partial opposition to the movants are declared to be superior to that of the motions of the mechanic's lienors with regard to the plaintiff. The entry of judgment hereon shall be stayed question of the standing of any lien of the common pending the determination of the plaintiff's action for charges. Notwithstanding the board of managers' failure foreclosure. That branch of the defendant to answer the complaint, the court having invoked Dic-Underhill's motion for leave to serve an amended equitable jurisdiction in the motions before it, will answer is granted. Defendant may serve the proposed consider the question of the common charges since this amended answer within 10 days after service of the order topic permeates the controversy. [HN10] Avoidance of a to be entered hereon. The motion by National Wall multiplicity of actions in circumstances where there is a Systems for the appointment of a receiver is granted to community of interest in the subject matter and in the the sole extent that the present receiver shall be directed questions of law and fact involved in the general to maintain separate accounts for the two parcels so that controversy are grounds for assumption of jurisdiction by the property subject to the power of the receiver shall be equity (20 NY Jur, Equity, §§ 78, 79). The board of administered by him as two separate entities consisting managers contends that under section 339-z of the Real of: (1) the commercial building; and (2) the balance of Property Law, its lien is prior to all liens except those for the property. All assets of personalty deriving therefrom taxes and all sums unpaid on a first mortgage of record. shall be kept apart and not commingled without It contends [***44] further that because of plaintiff's permission of the court, and separate records of specific wrongdoings, the plaintiff has lost its priority over the receipts and expenditures of receivership funds shall be lien of the common charges. [HN11] Section 339-aa of maintained. The motion by the Attorney-General for the Real Property Law states that the lien provided for in summary judgment is denied. All other [***46] section 339-z of the Real Property Law "shall be effective branches of the motions and cross motions and all from and after the filing in the office of the recording requests for relief not embodied in formal notices or cross officer". The board of managers has not established that notices of motion are denied. it perfected any lien whatever, so that insofar as sections Exhibit FF: HNC Realty Company v. Bay View Tower Apartments Inc. 64 A.D.2d 417; 409 N.Y.S.2d 774 Page 1

1 of 52 DOCUMENTS

HNC Realty Company (Known in New York State as HNC Realty Company, Inc.), Appellant-Respondent, v. Bay View Towers Apartments, Inc. et al., Defendants; Atlas, Balogh Associates et al., Respondents; Alwinseal, Inc., Respondent-Appellant. (Action No. 1); National Wall Systems, Respondent, v. Bay View Towers Apartments, Inc. et al., Defendants; Williamsburg Steel Products Co. et al., Respondents; J & J Tile Company, Inc., Respondent-Appellant. (Action No. 2.)

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Appellate Division, Second Department

64 A.D.2d 417; 409 N.Y.S.2d 774; 1978 N.Y. App. Div. LEXIS 12744

November 13, 1978

PRIOR HISTORY: [***1] Cross appeals from an HNC Realty Co. v Bay View Towers Apts., 92 Misc order of the Supreme Court at Special Term (Angelo 2d 151. HNC Realty Co. v Bay View Towers Apts., 64 Graci, J.), entered July 15, 1977 in Queens County, AD2d . which, inter alia, determined that the building loan mortgage of HNC Realty Co. was subordinate to the liens DISPOSITION: Order of the Supreme Court, Queens of certain mechanics lienors. County, entered July 15, 1977, modified, on the law, by deleting the second decretal paragraph thereof and adding The Appellate Division, in an opinion by Justice to the first decretal paragraph thereof a provision also Damiani, affirmed, holding that mechanics' liens are granting summary judgment to defendants J & J Tile entitled to priority as against the lien of a building loan Company, Inc. and Alwinseal, Inc. As so modified, order mortgage in the application of the proceeds of a affirmed, with one bill of $ 50 costs and disbursements foreclosure sale where the lender and the borrower payable by HNC Realty Company jointly to all entered into a building loan contract, duly filed, which respondents appearing separately and filing separate required a surety payment bond to be given by the briefs, except J & J Tile Company, Inc. and Alwinseal, borrower whereby subcontractors would be entitled to Inc. sue on the bond as third-party beneficiaries, but the bond that was ultimately procured, which was not filed, gave CASE SUMMARY: no right of suit to third parties, and, as such, did not comply with the terms of the building loan contract and constituted a material modification thereof by impairing PROCEDURAL POSTURE: Cross appeals were filed the rights of the subcontractors, so that either the bond from an order of the Supreme Court at Special Term in itself or a memorandum expressing the substance of the Queens County (New York), in which partial summary modification was required to be filed with the County judgment was granted in favor of mechanics lienors in Clerk (Lien Law, § 22), and the failure to file defeats foreclosure suit in which plaintiff lender sought priority [***2] the priority of the lender's mortgage lien under for building loan agreements. section 13 of the Lien Law. Page 2 64 A.D.2d 417, *; 409 N.Y.S.2d 774, **; 1978 N.Y. App. Div. LEXIS 12744, ***2

OVERVIEW: The defendant borrower entered into building loan mortgage shall be superior to mechanics' building loan mortgage agreements with the plaintiff liens provided, inter alia, that the building loan contract is lender, in which the borrower agreed to furnish the lender filed as required by N.Y. Lien Law § 22. with a surety bond guaranteeing that the borrower would pay its subcontractors and materialmen funds due from the borrower for work performed, with funds disbursed Contracts Law > Contract Modifications > General by the lender. The final loan agreements included Overview different paragraphs concerning issuance of surety Real Property Law > Financing > Construction Loans payment bonds. Contemporaneous with the execution of Real Property Law > Financing > Mortgages & Other the building loan contracts, the borrower provided the Security Instruments > Mortgagee's Interests lender with a bond. Subsequently, mechanics lienors filed [HN2] N.Y. Lien Law § 22 provides that a building loan liens against the real property at issue. The trial court contract, and any modification thereof, must be in writing granted partial summary judgment in favor of the and, on or before the date of recording the building loan mechanics lienors. On review, the court held that the mortgage made pursuant thereto, must be filed in the mechanics' liens were entitled to priority against the lien office of the clerk of the county in which the land is of the building loan contracts because the mechanics situated. Any subsequent modification of the contract lienors were entitled to sue on the bond as third-party must be filed within 10 days after the execution of such beneficiaries, and the terms of the building loan contracts modification. If not so filed, the interest of each party to constituted a material modification. Therefore, the failure the contract in the real property affected thereby is to file the modifications in accordance with N.Y. Lien subject to the claims of persons who thereafter file Law § 22 defeated the normal statutory priority of the mechanics' liens. building loan mortgage, pursuant to N.Y. Lien Law § 13. Civil Procedure > Remedies > Bonds > Sureties > OUTCOME: The court affirmed partial summary Liability judgment in favor of the mechanics lienors in a Contracts Law > Types of Contracts > Construction foreclosure action. The court reversed judgment as to Contracts cross appeals of certain mechanics lienors, subject to Contracts Law > Types of Contracts > Guaranty proof of validity of their liens at trial. Contracts [HN3] There are two major types of bonds commonly CORE TERMS: building loan, subcontractors, surety, used in connection with private construction contracts. payment bond, summary judgment, lender, modification, The first is the performance bond, in which, generally, a obligee, building loan, , borrower, material modification, surety guarantees to the owner that a contractor will contractor's, faithfully, mechanic's, technical meaning, faithfully perform the provisions of his contract. It gives beneficiary, materialmen, covering, lienors, usage, no right of action on the part of third parties to recover subcontracts, general contractor, entitled to sue, for breach of the contractor's duty of performance. The mechanics' liens, mortgage lien, apartment, failure to file, second type of bond is now commonly known as a labor foreclosure, manifested and material bond, and is often called a "payment" bond, in which, generally, a surety guarantees to the owner that LexisNexis(R) Headnotes the claims of subcontractors will be paid by the general contractor. Subcontractors may sue to recover on this bond notwithstanding the fact that they are not the named obligee. Often, performance and payment bonds are Contracts Law > Secured Transactions > Perfection & combined into one instrument. Priority > Priority > Liens > Mechanics' Liens Real Property Law > Financing > Mortgages & Other Contracts Law > Third Parties > Beneficiaries > Claims Security Instruments > Foreclosures > General & Enforcement Overview [HN4] The general rule of construction to be used to Real Property Law > Nonmortgage Liens > Mechanics' determine whether a contract was intended for the benefit Liens of persons other than the obligee, is whether the contract [HN1] N.Y. Lien Law § 13 provides that the lien of a Page 3 64 A.D.2d 417, *; 409 N.Y.S.2d 774, **; 1978 N.Y. App. Div. LEXIS 12744, ***2 shows an intent to protect such persons by agreeing to see the first is the performance bond in which, generally, a that they are paid; the intention of the parties manifested surety guarantees to the owner that a contractor will in their agreement is controlling. faithfully perform the provisions of his contract and it gives no right of action on the part of third parties to recover for breach of the contractor's duty of Civil Procedure > Summary Judgment > Opposition > performance; the second type of bond is commonly General Overview known [***3] as a labor and material bond, often called Civil Procedure > Summary Judgment > Standards > a "payment" bond, in which, generally, a surety Genuine Disputes guarantees to the owner that the claims of subcontractors Real Property Law > Financing > Mortgages & Other will be paid by the general contractor and subcontractors Security Instruments > Formalities may sue to recover on this bond notwithstanding the fact [HN5] It is incumbent upon a party opposing a motion for that they are not the named obligee. summary judgment to assemble, lay bare and reveal its proofs to establish the existence of a genuine issue of fact Contracts -- Agreement for Benefit of Third for trial. Parties

2. The general rule of construction to be used to Contracts Law > Contract Interpretation > Parol determine whether a contract was intended for the benefit Evidence > Custom & Usage of persons other than the obligee, is whether the contract Evidence > Documentary Evidence > Parol Evidence shows an intent to protect such persons by agreeing to see [HN6] It is a well-established rule of contractual that they are paid and the intention of the parties interpretation that words are to be given their plain and manifested in their agreement is controlling; accordingly, normal meaning and that technical words are to be given the plain meaning of language in a building loan contract, their generally accepted technical meaning. However, the which clearly stated that the party borrowing the money usage of the parties may vary the normal or technical was to provide surety payment bonds "covering meaning of the words and, where possible, the words of subcontractors" is that the coverage of the bond to be the contract will be given the meaning which best provided was to extend to subcontractors and that they effectuates the intention of the parties. would be entitled to sue thereon sue as third-party beneficiaries. Contracts Law > Contract Interpretation > General Overview Judgments -- Summary Judgment [HN7] In the absence of any such extrinsic proof, inquiry 3. It is incumbent upon a party opposing a motion for as to the meaning of the contract should be confined to summary judgment to assemble, lay bare and reveal its the instrument itself and the meaning of technical terms proofs to [***4] establish the existence of a genuine as defined in current treatises on insurance or in case law. issue of fact for trial.

Contracts Law > Contract Modifications > General Contracts -- Construction Overview 4. The words in a contract are to be given their plain [HN8] A modification of a building loan contract is and normal meaning and technical words are to be given "material" if it (1) alters the rights and liabilities their generally accepted technical meaning; however, the otherwise existing between the parties to the agreement usage of the parties may vary the normal or technical or (2) enlarges, restricts or impairs the rights of any meaning of the words and, where possible, the words of third-party beneficiary. the contract will be given the meaning which best effectuates the intention of the parties. Parol evidence is HEADNOTES admissible regarding usage and custom and to define the Suretyship and Guarantee -- Bonds meaning intended by the parties of a particular term used in a contract, although in the absence of any extrinsic 1. There are two major types of bonds commonly proof, inquiry as to the meaning of the contract should be used in connection with private construction contracts: confined to the instrument itself and the meaning of Page 4 64 A.D.2d 417, *; 409 N.Y.S.2d 774, **; 1978 N.Y. App. Div. LEXIS 12744, ***4 technical terms as defined in current treatises or in case M. Rathkopf of counsel), for Williamsburg Steel Products law. Co. and another, respondents.

Contracts -- Building Loan Contract -- Material Amen, Weisman & Butler (Robert D. Weisman of Modification counsel), for Simpson Electric Corp., respondent.

5. A modification of a building loan contract is Shapiro & Brown (David Brown of counsel), for Anthony "material" if it alters the rights and liabilities otherwise Perri, Inc., respondent (no brief). existing between the parties to the agreement or enlarges, restricts or impairs the rights of any third-party Sonnenfeld & Busner for Jack Brown and others, beneficiary. respondents (no brief).

Liens -- Mechanic's Lien -- Priority JUDGES: Damiani, J. Hopkins, J. P., Latham and Suozzi, JJ., concur. 6. Mechanics' [***5] liens are entitled to priority as against the lien of a building loan mortgage in the OPINION BY: DAMIANI application of the proceeds of a foreclosure sale where the lender and the borrower entered into a building loan OPINION contract, duly filed, which required a surety payment bond to be given by the borrower whereby subcontractors would be entitled to sue on the bond as third-party [*419] OPINION OF THE COURT beneficiaries, but the bond that was ultimately procured, which was not filed, gave no right of suit to third parties, [**776] The issue in this case is whether certain and, as such, did not comply with the terms of the mechanics' liens are entitled to priority as against the lien building loan contract and constituted a material of a building loan [*420] mortgage in the application of modification thereof by impairing the rights of the the proceeds of a foreclosure sale. [HN1] Section 13 of subcontractors, so that either the bond itself or a the Lien Law provides that the lien of a building loan memorandum expressing the substance of the mortgage shall be superior to mechanics' liens provided, modification was required to be filed with the County inter alia, that the building loan contract [***7] is filed Clerk (Lien Law, § 22), and the failure to file defeats the as required by section 22 of the Lien Law. [HN2] Section priority of the lender's mortgage lien under section 13 of 22 provides that a building loan contract, and any the Lien Law. modification thereof, must be in writing and, on or before the date of recording the building loan mortgage made COUNSEL: Paul, Weiss, Rifkind, Wharton & Garrison pursuant thereto, must be filed in the office of the clerk of (Allan Blumstein, Joseph E. Browdy and Richard the county in which the land is situated. Any subsequent Wasserman of counsel), for appellant-respondent. modification of the contract must be filed within 10 days after the execution of such modification. If not so filed, LeVine, Lipton, Rosenthal & Weinstein (Norman L. the interest of each party to the contract in the real Rosenthal of counsel), for Alwinseal, Inc., property affected thereby is subject to the claims of respondent-appellant. persons who thereafter file mechanics' liens. Here, the lender, HNC Realty Company (hereinafter HNC), and the Altieri, Kushner [***6] & Miuccio (Marc L. Zoldessy borrower, Bay View Towers Apartments, Inc. of counsel), for J & J Tile Company, Inc., (hereinafter Bay View), entered into a building loan respondent-appellant. contract which required a certain type of bond. The mechanics lienors contend that the bond that was given Donald Tirschwell for National Wall Systems, by Bay View and accepted by HNC does not comply with respondent. the requirements of the building loan contracts, that it therefore constituted a material modification of the Santangelo & Santangelo (Bernard B. Cohen of counsel), contract and that the failure to file it in accordance with for Imperial Sheet Metal Works, Inc., respondent. section 22 of the Lien Law defeats the normal statutory Golenbock & Barell (Arthur C. Silverman and Stephen priority of the building loan mortgage. [***8] The Page 5 64 A.D.2d 417, *420; 409 N.Y.S.2d 774, **776; 1978 N.Y. App. Div. LEXIS 12744, ***8 specific facts are as follows: than ten (10) days prior to the date of delivery thereof to the lender, which Request of Advance Certificate shall be The instant dispute arises from the failure of a accompanied by the following *** multimillion dollar project involving the construction of two luxury high rise [**777] apartment buildings and "27.8 Copies of all contracts and subcontracts for appurtenant facilities in the Bayside section of Queens the work and materials referred to in such Request for County. After several preliminary financing Advance Certificate not theretofore submitted to and arrangements, Bay View entered into several agreements approved in writing by lender, which contracts and with HNC. The first of these was a building loan contract subcontracts shall be in form and substance satisfactory dated January 22, 1973. Paragraph 21 of that agreement to, and shall be approved in writing by, lender, together provided, in substance, that the principal (Bay View) with surety payment bonds, issued by a surety company would furnish the obligee (HNC) "with a surety bond or companies qualified to do business in the State of New guaranteeing that the Principal faithfully pay its York and satisfactory to lender, in which borrower shall subcontractors and materialmen funds due from the be the principal, covering all concrete, electrical and Principal for work performed and materials furnished, as plumbing subcontractors under such contracts and said work or materials have been approved by the subcontracts, and all other subcontracts thereunder whose Obligee, with the funds disbursed by the Obligee to the contracts shall be for $ 1,000,000.00 or more, in the full Principal for this purpose." This building loan contract amounts of their respective contracts, and such additional was amended by agreements dated January 22, April 16, surety payment bonds, or endorsements to bonds April 17 and July 20, 1973. previously issued, as may be necessary to cover all subcontractors and supplies representing in the aggregate Finally, a whole new financing arrangement was not less than 65% of the total cost of labor and materials worked out for a 41 million dollar building loan and a incurred in the construction [***11] of [*422] both new building loan [*421] contract was prepared. The Apartment Buildings and all site improvements at the new loan closed, and the new building loan contract was Site." (Emphasis supplied.) signed, [***9] on August 30, 1973. The record is unclear as to whether this new building loan contract It appears that paragraphs 27 and 27.8 of the August superseded the prior contract, but it appears as though it 30, 1973 contract were intended to accomplish the same did. goal as paragraph 21 of the January 22, 1973 building loan contract. In substance, they require that upon every For the purpose of this case, the crucial paragraphs advance of money by HNC to Bay View, the latter must of the building loan contract of August 30, 1973 are provide "surety payment bonds" to the former "covering" numbers 27 and 27.8, which state: (1) all concrete, electrical and plumbing subcontractors, (2) subcontractors whose contracts were for $ 1,000,000 "27. The lender has this day advanced to the or more and (3) all other subcontractors representing not borrower the sum of Nine Million Six Hundred Fifty-Two less than 65% of the cost of labor and [**778] materials Thousand Seven Hundred Fifty-Three Dollars ($ incurred in construction of the buildings and other site 9,652,753). The borrower may, from time to time, improvements. request advances on account of the remainder of the loan from the lender, which requests shall be based on work in Contemporaneous with the execution of the August place at the premises, and the lender, at its discretion, 30, 1973 building loan contract, Bay View provided HNC may honor such request and advance to the borrower the with a bond. The prime issue in this case is whether this amount requested, except that, subject to all of the other bond complies with the requirements of paragraph 27.8 terms, covenants and conditions of this agreement, lender of the building loan contract or is a material modification shall honor at least one request per month. Each such thereof. The first whereas clause of the bond notes the request shall be made by borrowers delivering to the existence of the January 22, 1973 building loan contract lender at least ten (10) days prior to the making of the and its amendments, wherein Bay View agreed to advance a fully completed and executed Request for construct the apartment buildings [***12] and HNC Advance Certificate in the form of Exhibit B annexed agreed to lend the funds for construction. The second hereto and hereby made a part hereof, which Request for whereas clause notes the existence of paragraph 21 of the Advance Certificate shall be [***10] dated not more Page 6 64 A.D.2d 417, *422; 409 N.Y.S.2d 774, **778; 1978 N.Y. App. Div. LEXIS 12744, ***12

January 22, 1973 building loan contract, which required certain subcontracts, that thereafter he delivered the Bay View to furnish HNC with a surety bond building loan mortgage and building loan contract to a guaranteeing that Bay View would faithfully pay its title company for filing and, finally, that those documents subcontractors and materialmen. The third whereas were subsequently returned to him with appropriate clause states: "whereas, notwithstanding the condition of stamps indicating that they had been properly filed. Paragraph 21 of said Agreement dated January 22, 1973, as amended, providing that the Principal furnish the The motion for summary judgment came on to be Obligee with a 'surety payment bond' to guarantee heard before Mr. Justice Angelo Graci. He rendered an payment of the costs of labor and material incurred in the opinion holding, in substance, that the bond which was construction of said buildings, the Surety agrees to given was not a "surety payment bond" as required by the guarantee that the Principal will faithfully account for the contract because, by definition, such bonds run in favor funds disbursed by the Obligee to the Principal for this of subcontractors and materialmen whereas this bond, by purpose as recited in this instrument. The Obligee agrees its own specific terms, did not. Therefore, the acceptance to accept this bond as written in lieu of anything of this bond constituted a material modification of the contained in said Agreement dated January 22, 1973, as terms of the contract, requiring that the bond be filed. amended, to the contrary." (Emphasis supplied.) The Partial summary judgment was granted to the moving bond specifically noted that it was for the benefit of HNC mechanics lienors, declaring the lien of HNC's building only and that no other party had any right nor might bring loan mortgage subordinate to their liens, subject to proof any action on it. of [**779] the validity of such liens at the trial ( HNC Realty Co. v Bay View Towers Apts., 92 [***15] Misc 2d The building loan contract dated August 30, 1973 151). was filed in accordance [***13] with the provisions of section 22 of the Lien Law. The bond was not filed. HNC has appealed contending that there was no Thereafter, construction continued [*423] for about one modification of the building loan contract because the year until the project failed and HNC took possession of bond that was given was a "surety payment bond" and the premises. Because of Bay View's default, HNC even if it did not comply with the terms of the contract, exercised its option to accelerate the due date of the the modification was [*424] immaterial and therefore principal debt and commenced this action to foreclose its did not require filing under section 22 of the Lien Law. building loan mortgage. At the same time, numerous These contentions are without merit. subcontractors and materialmen commenced an action to foreclose their liens. The foreclosure actions were [HN3] There are two major types of bonds consolidated. commonly used in connection with private construction contracts. The first is the performance bond, in which, On March 31, 1977 Simpson Electric Corp., one of generally, a surety guarantees to the owner that a the lienors, moved for summary judgment declaring that contractor will faithfully perform the provisions of his its mechanic's lien had priority over HNC's mortgage contract. It gives no right of action on the part of third lien. The motion was based upon the alleged parties to recover for breach of the contractor's duty of noncompliance by HNC with the strict provisions of performance ( Scales-Douwes Corp. v Paulaura Corp., section 22 of the Lien Law. Simpson Electric, in its 24 NY2d 724, 726; 17 Am Jur 2d, Contractors' Bonds, § motion, claimed that HNC's acceptance of a bond which 20). did not comply with the terms of the contract constituted a material modification of the contract and that it should The second type of bond is now commonly known as therefore have priority over HNC's mortgage lien. a labor and material bond, and is often called a Numerous other mechanics lienors joined in Simpson "payment" bond, in which, generally, a surety guarantees Electric's summary judgment motion. to the owner that the claims of subcontractors will be paid by the general contractor. Subcontractors may sue to The motion for summary judgment was opposed recover on this bond notwithstanding the fact that they solely [***14] by the affidavit of an associate of the firm are not [***16] the named obligee ( Daniel-Morris Co. v representing HNC. He stated simply that he had attended Glens Falls Ind. Co., 308 NY 464, 468; 13 Couch, the closing of the building loan and received copies of Insurance [2d ed], § 47:174 et seq.; 9 NY Jur, Contractors' Bonds, § 18). Often, performance and Page 7 64 A.D.2d 417, *424; 409 N.Y.S.2d 774, **779; 1978 N.Y. App. Div. LEXIS 12744, ***16 payment bonds are combined into one instrument. proofs to establish the existence of a genuine issue of fact for trial ( Di Sabato [**780] v Soffes, 9 AD2d 297, 301). The ordinary situation in which performance or [HN6] It is a well-established rule of contractual payment bonds are used is one in which the owner of the interpretation that words are to be given their plain and property hires a general contractor for the construction, normal meaning and that technical words are to be given who in turn uses the services of subcontractors. The their generally accepted technical meaning. However, the purpose of a "payment" bond in such a situation is to usage of the parties may vary the normal or technical protect the equity of the owner in his property against the meaning of the words and, where possible, the words of claims of unpaid subcontractors. The facts in the case at the contract will be given the meaning which best bar are substantially different. Here, the owner of the effectuates the intention of the parties (Simpson, property, Bay View, also acted as the general contractor. Contracts [2d ed], § 102, p 209). Parol evidence would The mortgagee, HNC, was the party that required a surety have been admissible to introduce proof of usage and payment bond. custom and to define the meaning intended by the parties of the term "surety payment bond" as used in the contract [HN4] The general rule of construction to be used to (see Simpson, Contracts [2d ed], § 98, p 197; § 101, pp determine whether a contract was intended for the benefit 206-208). HNC could therefore have produced affidavits of persons other than the obligee, is whether the contract from, inter alia, the drafter of the contract, the person shows an intent to protect such persons by agreeing to see who negotiated [***19] and signed the contract on its that they are paid; the intention of the parties manifested behalf, and an expert in the field of insurance, as to the in their agreement is controlling (13 Couch, Insurance usage of the parties or the technical meaning of the [2d ed], § 47:193). Here, the building [***17] loan phrase. It did not do so. [HN7] In the absence of any contract states very clearly that Bay View was to provide such extrinsic proof, inquiry as to the meaning of the surety payment bonds "covering * * * subcontractors". contract should be confined to the instrument itself and (Emphasis added.) The plain meaning of this language is the meaning of technical terms as defined in current that the coverage of the bond to be provided was to treatises on insurance or in case law (see, e.g., Couch, extend to subcontractors and that they would be entitled Insurance [2d ed]; 9 NY Jur, Contractors' Bonds, § 11; to sue thereon. The bond that was given does not comply Contractor's Bond -- Laborers or Materialmen, Ann. 77 with this unmistakable intent of the contract. It ALR 21, 55). Read in this light, and considering all of the specifically states [*425] that it is for the benefit of surrounding circumstances, the unmistakable [*426] HNC only and it merely guarantees that Bay View will meaning of the contract, as stated above, is that the "faithfully account" for the funds disbursed pursuant to coverage of the required bond was to extend to the the building loan. Thus it amounts to nothing more than benefit of subcontractors, who, as third-party an agreement to indemnify HNC for any beneficiaries, were to have the right to sue thereon. The misappropriation of the building loan moneys by Bay bond provided by Bay View and accepted by HNC, gave View. no right of suit to third parties and thus constituted a HNC contends, for the first time on this appeal, that modification of the contract. there is a question of fact presented on the record as to The next question is whether such modification was whether the parties intended that subcontractors be "material" so as to require that it be filed pursuant to entitled to sue upon the surety payment bond required by section 22 of the Lien Law. The test was appropriately the August 30, 1973 building loan agreement and that stated by Mr. Justice Graci in Security [***20] Nat. this question of fact is sufficient to preclude summary Bank v Village Mall at Hillcrest (85 Misc 2d 771, judgment. 781-782) and by Mr. Justice Lynde in New York Sav. At Special Term, however, HNC contended that the Bank v Wendell Apts. (41 Misc 2d 527, 529); namely, interpretation of the building loan contract was a matter [HN8] a modification of a building loan contract is of law for the court and this is [***18] manifested by the "material" if it (1) alters the rights and liabilities fact that it saw fit to submit only a two-page affidavit in otherwise existing between the parties to the agreement opposition to the motion for summary judgment. [HN5] It or (2) enlarges, restricts or impairs the rights of any is incumbent upon a party opposing a motion for third-party beneficiary. This case comes within the summary judgment to assemble, lay bare and reveal its second category. There is no question that HNC's failure Page 8 64 A.D.2d 417, *426; 409 N.Y.S.2d 774, **780; 1978 N.Y. App. Div. LEXIS 12744, ***20 to exact compliance with the contract's requirement that the order under review should be affirmed insofar as Bay View procure a surety payment bond "covering * * * appealed from by HNC Realty Company. As to the cross subcontractors" worked to impair the rights of those appeals of J & J Tile Company, Inc. and Alwinseal, Inc., subcontractors. Had the required bond been given, the the order under review should be reversed insofar as subcontractors would have been paid directly by the appealed from and summary judgment granted those surety and this lawsuit would have been avoided. parties, subject to proof of the validity of their liens at the trial. The papers of those parties, submitted in support of Accordingly, HNC's acceptance of a bond which did the motions for summary judgment, sufficiently indicated not comply with the terms of the building loan contract that they were requesting the same relief as the other constituted a material modification thereof, so that either mechanics lienors. Although those papers were irregular the bond itself or a memorandum expressing the in that they failed to contain a cross notice of [*427] substance of the modification was required to be filed motion for summary judgment, all the circumstances of with the county clerk by the terms of section 22 of the this case indicate that they, too, should be awarded Lien Law, and the failure to file defeats the priority of summary judgment in the interest of judicial economy HNC's mortgage [***21] lien under section 13 of the (see CPLR 3212, subd [b]; see, also, Peoples [**781] Lien Law. Sav. Bank of Yonkers, N. Y. v County Dollar Corp., 43 AD2d 327, 334, affd 35 NY2d 836). We have considered the other contentions raised by HNC and find them to be without merit. Accordingly, Exhibit GG: International Exterior Fabrications, LLC v. J. Petrocelli Contracting, Inc. et al. 2011 N.Y. Misc. Lexis 2777 Page 1

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[**2] INTERNATIONAL EXTERIOR FABRICATIONS, LLC, Plaintiff, -against- J. PETROCELLI CONTRACTING, INC., 245 10TH AVENUE, LLC, J&A CONCRETE CORP. DITMARS CONSTRUCTION CORP., CROSSROADS CONSTRUCTION CORP., FAST RESPONSE, INC., LIF INDUSTRIES, INC., DEM INTERIORS, LLC, P.I. MECHANICAL CORP., HIGHTOWER CONSTRUCTION, INC., MEGA PAINTING & DECORATING, INC., GREENWICH VILLAGE PLUMBERS' SUPPLY CORP., HANDRAIL DESIGN, INC., CROWNE CONSULTING, L.L.C, CITIGROUP GLOBAL MARKETS REALTY CORP. and "JOHN DOE NO. 1" though "JOHN DOE NO. 5," Defendants. Index No. 101679/10

101679/10

SUPREME COURT OF NEW YORK, NEW YORK COUNTY

2011 N.Y. Misc. LEXIS 2777; 2011 NY Slip Op 31545(U)

February 23, 2011, Decided April 11, 2011, Filed

NOTICE: THIS OPINION IS UNCORRECTED AND DECISION AND ORDER WILL NOT BE PUBLISHED IN THE PRINTED OFFICIAL REPORTS. ALEXANDER W. HUNTER, JR., J:

CORE TERMS: mortgage, building loan, loan The motion by defendant Citigroup Global Markets agreement, mechanic's lien, recorded, modification, cause Realty Corp ("Citigroup") for summary judgment of action, recording, clerk's, funding, consolidated, dismissing plaintiff's fourth cause of action is granted. contractor, notice, foreclosure action, condominiums, The cross motion by plaintiff International Exterior matter of law, summary judgment, securing, predecessor, Fabricators, LLC for (1) summary judgment establishing Lien Law, construction project, construction loan, filing that its mechanic's lien is superior to Citigroup's requirement, funds available, real property, leave to mortgages against the premises; (ii) amending the amend, indebtedness, borrower, finance, newly complaint to conform to the evidence reflecting that the plaintiff's mechanic's lien is superior to the Citigroup JUDGES: [*1] PRESENT: Alexander W. Hunter, Jr., mortgages; and (iii) consolidation of the Citigroup action J.S.C. with plaintiff's action is denied in all respects. Defendant Citigroup seeks the dismissal of plaintiff's OPINION BY: Alexander W. Hunter, Jr. fourth cause of action in its complaint, which seeks to enforce plaintiff's alleged mechanic's lien. OPINION Citigroup is the holder of two mortgages Page 2 2011 N.Y. Misc. LEXIS 2777, *1; 2011 NY Slip Op 31545(U), **2

encumbering property at in New York, New York ("the building loan agreement was properly and timely filed as property") and earlier last year it commenced a mortgage a matter of law. Therefore, Citigroup's building loan foreclosure action that is currently pending before this mortgage is senior to plaintiff's alleged mechanic's lien. Court. The two mortgages secured loans [**3] made by Citigroup to defendant 245 10th Avenue LLC ("245"), [**4] STATEMENT OF FACTS the property owner, for [*2] the construction of condominiums on the property. In the related action, Citigroup Global Markets Realty Corp, v. 245 10th Avenue, LLC et al, No. In this action, plaintiff, a sub-contractor who 600679/10 (Sup. Ct. N.Y. County), Citigroup is seeking allegedly worked on that construction project, brought to foreclose [*4] on two mortgages it holds on the suit to seek payment from the general contractor, property securing loans made to the owner of the defendant J. Petrocelli Contracting, Inc. ("Petrocelli") and property, defendant 245. Only one of these mortgages is to enforce plaintiffs purported mechanic's lien which it relevant here, that is, Citigroup's building loan mortgage claims it filed against the property. dated September 26, 2007.

Only the fourth cause of action asserted by plaintiff In 2006, defendant 245 purchased the property is the focus of this proceeding. In the cause of action, intending to construct condominiums. To finance the plaintiff claims that its mechanic's lien is superior to any construction and marketing of the condominiums, it interests or liens held by the defendants, including the sought and received numerous loans. Towards that end, mortgages held by Citigroup. Specifically, plaintiff defendant 245 hired defendant Petrocelli to serve as the claims that Citigroup failed to timely file its building loan general contractor for the construction of the agreement in violation of New York Lien Law § 22. condominiums, and Petrocelli engaged subcontractors to Plaintiff alleges that Citigroup entered into "several perform specialized work on the project, including the building loan modifications," did not file them within ten plaintiff. Plaintiff alleges that it has not received days of their execution, and did not file them "on or complete payment for the work it claims to have before" the date Citigroup's mortgages were recorded. performed on the project.

Summary judgment is appropriate here. Section 22 In September 2007, defendant 245 sought additional of the New York Lien Law only requires that a building funding for this project. Citigroup provided project loan loan agreement be filed "on or before the date of financing for marketing and other costs, and this debt was recording the building loan mortgage made pursuant secured with a mortgage that is not relevant to this action. thereto." The only exception [*3] is that any subsequent In addition, Citigroup provided the owner with additional modification to such a building loan agreement must be construction funding. As part of that construction loan filed with ten days of its execution. package, on September 26, 2007, Citigroup was assigned an existing predecessor mortgage on [*5] the property, as The filing of Citigroup's building loan agreement well as a predecessor building loan agreement. Citigroup was performed in compliance with New York Lien Law § also created an additional gap mortgage to secure the 22. First, there was only one building loan agreement additional funding provided with its building construction between Citigroup and the borrower/owner and the loan loan.1 agreement was executed on September 6, 2007, the very same day it entered into the related building loan 1 The history of the building loan financing is mortgage. Second, this building loan agreement was filed detailed in Defendant Citigroup's complaint in its with the New York County Clerk on December 20, 2007, related mortgage foreclosure action, which is many months before the related building loan mortgage attached as Exhibit 1 to Defendant Citigroup's was recorded with the New York City Register on answer in this action. That Answer is attached as February 26, 2008. Third, there were no subsequent Exhibit B to the accompanying Berry modifications to that loan agreement. Therefore, the Affirmation. ten-day exception in New York Lien Law § 22 is inapplicable. The assigned predecessor mortgage and the newly created gap mortgage were then consolidated to create an Since these facts are not disputed or denied, the entirely new mortgage to secure all of the funding Page 3 2011 N.Y. Misc. LEXIS 2777, *5; 2011 NY Slip Op 31545(U), **4

provided by Citigroup in its construction loan package CONCLUSIONS OF LAW (the "Citigroup Building Loan Mortgage"). Citigroup entered into two agreements with defendant 245 to Citigroup is entitled to summary judgment because it memorialize the terms of the new Citigroup Building filed the Citigroup Building Loan Agreement before the Loan Mortgage and the new indebtedness secured by that corresponding Citigroup Building Loan Mortgage was new lien, namely, the parties executed (i) the Amended recorded which is all the New York Lien Law§ 22 and Restated Building Loan Agreement and (ii) the requires. Summary judgment must be granted if Consolidated, [**5] Amended and Restated Building Citigroup establishes its "defense 'sufficiently to warrant Loan Mortgage and Security Agreement, each dated a court as a matter of law in directing judgment' [**6] in September 26, 2007. The latter loan agreement (the [its] favor." Zuckerman v. City of N.Y., 49 N.Y.2d 557, "Citigroup Building Loan Agreement") is the contract 562, 404 N.E.2d 718, 427 N.Y.S.2d 595 (1980) (quoting [*6] that is at issue here. N.Y. C.P.L.R. 3212(b)). Once that [*8] showing is established, plaintiff will have the burden of showing, in Citigroup filed the Citigroup Building Loan admissible form, that "material questions of fact" exist. Agreement with the New York County Clerk on Id. "[M]ere conclusions, expressions of hope or December 20, 2007. The Citigroup Building Loan unsubstantiated allegations or assertions are insufficient." Agreement included a written and notarized statement by Id; see also HSBC Mortgage Servs., Inc. v. Alphonso, 16 Defendant 245, confirming the consideration to be paid Misc.3d 1131[A], 2007 NY Slip Op 51657[U], Slip for the loan and the net sum available to the owner. Two Copy, 2007 WL 2429711, at *1 (N.Y. Sup. Ct., Kings months later, the Citigroup Building Loan Mortgage was County 2007), aff'd, 58 A.D.3d 598, 874 N.Y.S.2d 131 recorded on February 26, 2008 at the City Register, file (2d Dep't 2009) (granting summary judgment where No. 2008000077823, and all required taxes and charges priority of mortgages was in dispute). were paid. The filing of the Citigroup Building Loan Agreement and the subsequent recording of the Citigroup Here, plaintiff speculates that its alleged mechanic's building loan mortgage are evidenced by the cover pages lien is somehow superior to the Citigroup Building Loan for each of these documents. Mortgage under the New York Lien Law. But that speculation is based on a misunderstanding of the facts Plaintiff alleges it satisfactorily and timely concerning the filing of the Citigroup Building Loan performed the work it was hired to do by Petrocelli but Agreement and the recording of the related Citigroup has not received full compensation. So, on November 13, Building Loan Mortgage. 2009, a year and a half after the Citigroup Building Loan Mortgage was recorded, plaintiff filed a Notice of Section 22 of the New York Lien Law governs the Mechanic's Lien against defendant 245 for $361,990.99. priority of liens related to building loans. See N.Y. Lien Law § 22 (2010). The purpose of the statute is to On or about February 8, 2010, plaintiff commenced establish a system of public notice that allows contractors this action to recover monies allegedly owed by Petrocelli to determine the amount of funds available to finance the and to enforce its mechanic's lien against the defendants. construction project and thus to pay for their services. See Howard Savings Bank v. Lefcon P'ship, 209 A.D.2d 473, In its complaint, plaintiff [*7] alleges that Citigroup 475, 618 N.Y.S.2d 910, 913 (2d Dep't 1994).2 [*9] Thus, and Defendant 245 "entered into several modified the statute sets forth two conditions that must be satisfied building loan contracts ("the Building Loan Contracts") for a mortgage securing a building loan contract to be including subsequent modifications of the Building Loan enforceable. See N.Y. Lien Law § 22 (2010). First, a Contracts." Plaintiff further alleges that Citigroup did not building loan contract must be in writing and include, file these so-called "Building Loan Contracts" and their among other things, the net sum available to the borrower subsequent modifications "with the New York County for the intended improvement. See id.3 Second, the Clerk within ten days after their execution." In addition, building loan contract must be filed in the County Clerk's plaintiff contends that these "Building Loan Contracts" Office before the related mortgage is recorded: were not filed "on or before the date of the filing of the (Citigroup Building Loan Mortgage)." Thus, plaintiff [**7] A building loan contract ... must contends that its mechanic's lien has priority over the ... on or before the date of recording the Citigroup Building Loan Mortgage. Page 4 2011 N.Y. Misc. LEXIS 2777, *9; 2011 NY Slip Op 31545(U), **7

building loan mortgage made pursuant In its complaint, however, plaintiff contends that its thereto, to be filed in the office of the clerk mechanic's lien is superior because the Citigroup of the county in which any part of the land Building Loan Agreement was not filed within ten days is situated, except that any subsequent of its execution on September 26, 2007. But that ten-day modification of any such building loan filing requirement has no applicability here. There is no contract so filed must be filed within ten question that the Citigroup Building Loan Mortgage was days after the execution of any such "made pursuant to" the Citigroup Building Loan modification. Id. (emphasis added). Agreement - this mortgage was newly created to secure the additional funding governed by that loan agreement - and it was created on the same day that loan agreement was executed. Thus, Lien Law § 22 only required the 2 See also Realty Improvement Funding Co. v Citigroup Building Loan Agreement to be filed before the Stillwell Gardens, Inc., 91 Misc. 2d 718, 719, 398 Citigroup Building Loan Mortgage was recorded which N.Y.S.2d 480, 481 (N.Y. Sup Ct. Westchester was done here. The ten-day filing requirement would County 1977) (describing policy behind only have applied if there were subsequent modifications enactment of statute); New York Savings Bank v. to the Citigroup Building Loan Agreement, and in this Wendell Apartments, Inc., 41 Misc. 2d 527, 529, case, there were none. 245 N.Y.S2d 827, 829 (N.Y. Sup. Ct. Nassau County 1963) [*10] (internal citations omitted). As a result, Citigroup [*12] complied with all 3 New York Lien Law defines a "building loan aspects of § 22 of the New York Lien Law. Accordingly, contract" as "a contract whereby a ... 'lender,' in Plaintiff's alleged mechanic's lien is junior to the consideration of the express promise of an owner Citigroup Building Loan Mortgage because the Citigroup to make an improvement upon real property, mortgage was recorded almost two years before plaintiff's agrees to make advances to or for the account of [**8] alleged lien. Plaintiff's fourth cause of action such owner to be secured by a mortgage on such against Citigroup requires dismissal as a matter of law. real property." N. Y. Lien Law § 2, subd. 13 (2010). The subject Project Loan Mortgage was not consolidated with, and is entirely separate from, the This provision ensures that the terms of a subject Building Loan Mortgage at issue. Thus, the construction loan are filed publicly (before the recording Project Loan Mortgage retains priority over plaintiff's of the related mortgage) to give contractors full notice of lien. Moreover, at the very least, the prior consolidated the funds available to pay them, and that any subsequent mortgage of $15,224,500.83, that was later consolidated amendments to those terms are made public in a timely to form the new Project Loan Mortgage, retains its manner. If these requirements are not met, a mechanic's priority over plaintiff's mechanic's lien regardless of any lien is given priority over the mortgage securing the potential Lien Law issues. construction loan. See id; Howard Savings Bank, 209 A.D.2d at 475, 618 N.Y.S.2d at 913 (holding mortgagee A motion for leave to amend a complaint should be kept priority over liens as it properly filed building loan denied where it is demonstrated that the cause of action is agreement pursuant to N.Y. Lien Law § 22). without merit (e.g., East Asiatic Co. v. Corash, 34 AD2d 432, 312 N.Y.S.2d 311 [1st Dept 1970]). By virtue of all Herein, these requirements have been satisfied. The the foregoing, there can be no question that plaintiff's Citigroup Building Loan Agreement was filed on fourth cause of action, claiming priority over Citigroup's December 20, 2007. The Citigroup Building Loan first two mortgages, and to which this motion is Mortgage, which secures the indebtedness governed by addressed, should be dismissed. [*13] As a result, that loan agreement, was recorded more than two [*11] plaintiff's request for leave to amend is denied. months later on February 26, 2008. Thus, the "building loan contract" was filed "on or before the date of By the very same token, plaintiff's related request to recording" of the "building loan mortgage made pursuant consolidate its action with Citigroup's related mortgage thereto." N.Y. Lien Law § 22. No more was required by foreclosure action is denied. Having demonstrated the Lien Law § 22 to ensure the priority of the Citigroup non-merit of plaintiff's claim of priority, no purpose is Building Loan Mortgage. served by any such consolidation. Moreover, plaintiff is Page 5 2011 N.Y. Misc. LEXIS 2777, *13; 2011 NY Slip Op 31545(U), **8

already a party in Citigroup's mortgage foreclosure action this court. and, as such, cannot be prejudiced. Date: Defendant Citigroup is directed to serve a copy of New York, New York this order with notice of entry upon the plaintiff and the other defendants by regular and certified mail (return February 23, 2011 receipt not required) at their last known addresses and file proof thereof with the clerk's office. Alexander W. Hunter, Jr.

This decision constitutes the decision and order of J.S.C. Exhibits HH: The New York Savings Bank v. Wendell Apartments, Inc., 245 N.Y.S. 2d 827 Page 1

1 of 55 DOCUMENTS

The New York Savings Bank, Plaintiff, v. Wendell Apartments, Inc., et al., Defendants

[NO NUMBER IN ORIGINAL]

Supreme Court of New York, Special Term, Nassau County

41 Misc. 2d 527; 245 N.Y.S.2d 827; 1963 N.Y. Misc. LEXIS 1482

October 29, 1963

CASE SUMMARY: and that this purpose was not served here. Because the agreement was not a modification, the court ruled that the mechanic's lien was subject to the mortgage, under N.Y. PROCEDURAL POSTURE: Plaintiff mortgagee Lien Law § 13(2). brought an action to foreclose a building loan mortgage made to defendant mortgagor. Defendant mechanic's OUTCOME: The court denied the mechanic's lienor's lienor filed a motion for summary judgment, claiming summary judgment motion, and struck, without that its lien was not subject to that of the mortgagee prejudice, the mechanic's leinor's answer to the extent because of the mortgagee's failure to file a modification that it sought to declare its lien prior in right to that of the of its building loan contract, pursuant to N.Y. Lien Law § mortgagee's mortgage. The court also awarded the 22. mortgagee summary judgment.

OVERVIEW: The date for the completion of the CORE TERMS: mortgage, modification, completion, construction, under the mortgagee's building loan building loan, extension agreement, building loan, notice agreement with the mortgagor, was extended. After the of lien, mechanic's, recorded, covenant, lienor, movant's, mortgagee filed the extension agreement, the mechanic's loan agreement, failure to file, mechanic's lien, real lienor filed its notice of lien. The court denied the property, essential terms, trust fund, contractors, mechanic's lienor's summary judgment motion. At the mortgagee, modify outset, the court noted that the extension agreement was filed more than 10 days after the extension agreement LexisNexis(R) Headnotes was executed. The court ruled, however, that § 22, which required all modifications to construction contracts to be filed within 10 days of execution or they become subject to subsequent liens, did not apply. In so ruling, the court Contracts Law > Contract Modifications > General found that the extension agreement was not a Overview modification because it did not change any of the Real Property Law > Financing > Construction Loans essential elements of the loan contract, or alter the rights Real Property Law > Nonmortgage Liens > Mechanics' and duties regarding payment. The court explained that Liens the purpose of § 22 was to protect materialmen from [HN1] N.Y. Lien Law § 22 mandates that a building loan secret agreements between the lender and the borrower, Page 2 41 Misc. 2d 527, *; 245 N.Y.S.2d 827, **; 1963 N.Y. Misc. LEXIS 1482, *** contract and any modification thereof must be filed in the COUNSEL: Leo Malman for Milton Kaplan, Inc., County Clerk's office on or before the date of recording defendant. the building loan mortgage made pursuant thereto except that any subsequent modification of the contract so filed Casimir J. P. Patrick for plaintiff. must be filed within 10 days after its execution. Section 22 further provides that if such contract is not so filed, the JUDGES: Edwin R. Lynde, J. interest of each party to the contract in the real property affected is subject to the lien and claim of a person who OPINION BY: LYNDE shall thereafter file a notice of lien. OPINION

Contracts Law > Types of Contracts > Covenants [*528] [**828] In this action to foreclose a Real Property Law > Nonmortgage Liens > Mechanics' building loan mortgage, a mechanic's lienor (Milton Liens Kaplan, Inc.) moves for summary judgment claiming its [HN2] N.Y. Lien Law § 13(2) provides that every lien is not subject to that of the mortgage because of mortgage recorded subsequent to the commencement of plaintiff's failure to file a modification of its building loan the improvement and before the expiration of four contract pursuant to section 22 of the Lien Law. months after the completion thereof shall, to the extent of advances made before the filing of a notice of lien, have The building loan contract and mortgage between the priority over liens thereafter filed if it contains the plaintiff and the owner of the property were both covenant required by subdivision three hereof. executed on August 29, 1961, and the contract was filed and the mortgage recorded on September 5, 1961. The HEADNOTES loan agreement specified that the improvement being financed was to be completed on or about August 1, [***1] Liens -- priority -- agreement extending 1962. However, on September 5, 1962, the agreement date for completion of construction but not changing was modified to extend the completion date to November terms of building loan agreement as to amount or 1, 1962. Two days after the extension agreement was manner of payment of advances is not "modification" signed, the plaintiff made its last advance pursuant to the of building loan contract within section 22 of Lien building loan contract and mortgage in the sum of $ Law and failure to file such extension agreement 34,058.85. within 10 days does not give subsequent mechanic's lienor priority under section 22. [***3] On October 9, 1962, the plaintiff filed the extension agreement, and on October 23, 1962, the A building loan contract, filed at the same time the movant filed its mechanic's lien for work allegedly companion mortgage was recorded, provided for a performed and completed between June 25, 1962 and completion date for the construction of August 1, 1962. September 4, 1962. By an agreement dated September 5, 1962 the completion date was extended to November 1, 1962, but the [HN1] Section 22 of the Lien Law mandates that a agreement was not filed within the 10 days specified by building loan contract and any modification thereof must section 22 of the Lien Law. Such section further provides be filed in the County Clerk's office on or before the date that, if a modification is not so filed, the interest of the of recording the building loan mortgage made pursuant parties to the contract in the real property is subject to the thereto except that any subsequent modification of the lien of one who subsequently files a notice of lien. contract so filed must be filed with 10 days after its Section 22 is applicable only to a "modification" of the execution. Section 22 further provides that if such contract and an agreement which extended the date for contract is not so filed, the interest of each [**829] party completion of the project is not a "modification" where it to the contract in the real property affected is subject to did not vary or modify any of the essential terms of the the lien and claim of a person who shall thereafter file a contract with respect to the amount [***2] or manner of notice of lien. payment of advances. Accordingly, plaintiff mortgagee In this case, the plaintiff admittedly failed to file the has priority over a mechanic's lien filed on October 23, extension agreement within 10 days after its execution, 1962. Page 3 41 Misc. 2d 527, *528; 245 N.Y.S.2d 827, **829; 1963 N.Y. Misc. LEXIS 1482, ***3 and the movant claims that as a result thereof its lien by extended the date for completion of the project. It did not force of statute acquires priority over the lien of the vary or modify any of the essential terms of the contract plaintiff's mortgage. This construction of the statute (Lien with respect to the amount or manner of payment of Law, § 22) would give a mechanic's lienor priority over a advances. Consequently, the extension accomplished duly recorded mortgage although the notice of lien was nothing contrary to the purpose for which section 22 was [***4] filed subsequent to any advances [*529] made designed. The latter section is intended as a safeguard to under the mortgage, and despite the fact that such materialmen against secret arrangements between the advances were actually made pursuant to the terms of the lender and borrower. ( Rosenblum v. Tilden Improvement building loan contract as originally made and duly filed. Co., 136 App. Div. 743.) The object of the statute "is to This construction would also do violence to [HN2] acquaint prospective contractors with the fact that they section 13 of the Lien Law which provides in subdivision furnish labor and materials subject to claims prior to 2 thereof that: "Every mortgage recorded subsequent to theirs against the property, so far as advances thereunder the commencement of the improvement and before the are prior to their liens when filed (Lien Law, § 13), and expiration of four months after the completion thereof also to inform such contractors of the amounts to be shall, to the extent of advances made before the filing of a advanced and the times of such advances." ( P. T. notice of lien, have priority over liens thereafter filed if it McDermott, Inc. v. Lawyers Mtge. Co., 232 N. Y. 336, contains the covenant required by subdivision three 341-342.) Since the extension agreement here left the hereof." The covenant referred to in subdivision 3 is the parties with the same rights and liabilities [**830] as covenant by the mortgagor to receive the advances as a existed [***6] under the original contract it may not be trust fund and to apply such advances to the payment of interpreted as a material alteration thereof. No right of the costs of the improvements before using them for any any person was enlarged or restricted or impaired by the other purpose. The trust fund covenant, in this case, was extension of the completion date, and the agreement of contained in the mortgage as well as the building loan September 5, 1962, is not a modification of the original contract. loan contract within the purview of section 22 of the Lien Law. The mortgagee is thus entitled to priority under In the situation that arose in this case, a literal section 13. The motion must be denied, and [*530] reading of section 22 of the Lien Law would appear to summary judgment awarded to the plaintiff. The give a mechanic's lienor a priority actually denied him movant's answer is stricken to the extent that it seeks to under section 13 of the same law. [***5] This result, declare its lien prior in right to the plaintiff's mortgage, however, only obtains in the event that the extension but without prejudice to movant's assertion of its claim in agreement can be construed as a modification of the surplus money proceedings. original building loan contract. The agreement merely Exhibit II: Howard Savings Bank v. Lefcon Partnership 618 N.Y.S. 2d 910 Page 1

1 of 50 DOCUMENTS

Howard Savings Bank, Respondent, v. Lefcon Partnership, Defendant and Third-Party Plaintiff, et al., Defendants, and Mitsubishi Trust and Banking Corporation, Respondent. E.W. Howell Co., Inc., Third-Party Defendant-Appellant.

91-07453, 92-00634

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

209 A.D.2d 473; 618 N.Y.S.2d 910; 1994 N.Y. App. Div. LEXIS 11240

April 19, 1994, Argued November 14, 1994, Decided

PRIOR HISTORY: [***1] In an action to foreclose OVERVIEW: Appellee bank loaned a developer $ a mortgage, the third-party defendant E.W. Howell Co., 67,500,000 to construct a 316-unit condominium Inc., appeals (1) from an order of the Supreme Court, complex. Appellant, construction company, was the Nassau County (O'Shaughnessy, J.), entered April 18, general contractor. Appellant agreed to perform the 1991, which (a) granted the motion of the plaintiff construction work for $ 67,850,000. Pursuant to N.Y. Howard Savings Bank and Mitsubishi Trust and Banking Lien Law § 22, appellee and developer filed with the Corporation for partial summary judgment dismissing the County Clerk a building loan agreement, mortgage, and appellant's first counterclaim and the appellant's first other documents detailing the amount of the loan and the cross claim, (b) denied the appellant's cross motion for various terms of the agreement. Developer defaulted and summary judgment against Howard Savings Bank and a foreclosure action was commenced. The trial court Mitsubishi Trust and Banking Corporation, and (c) granted appellee summary judgment declaring that declared that the appellant's lien on the subject real estate appellee's first mortgage had priority of appellant's was subordinate to the mortgage lien by Howard Savings mechanic's lien. The court affirmed, holding that the Bank and Mitsubishi Trust and Banking Corporation, and disclosure adequately informed contractors as to the net (2) as limited by its brief, from so much of an order of the sum of the building loan available for the project. The same court, entered June 28, 1991, as, upon renewal and disclosure contemplated by the Lien Law was not reargument, adhered to the original determination. intended to function as a guarantee of adequately financing. CASE SUMMARY: OUTCOME: The court affirmed the partial summary judgment grant to appellee bank, holding that the PROCEDURAL POSTURE: Appellant, construction disclosure required by the Lien Law was not intended to company, sought review of a decision of the Supreme guarantee adequately financing. Appellee's disclosure Court, Nassau County (New York), which granted adequately informed contractors as to the net sum of the appellee bank partial summary judgment declaring that building loan available for the project. appellee's first mortgage had priority over appellant's mechanic's lien in a foreclosure action. CORE TERMS: retainage, loan agreement, Page 2 209 A.D.2d 473, *; 618 N.Y.S.2d 910, **; 1994 N.Y. App. Div. LEXIS 11240, ***1 modification, developer, Lien Law, default, funding, continuing duty to apprise a contractor of the economic contractor, mortgage, notice, summary judgment, condition of its borrower. Rather, it is intended to provide reargument, renewal, loan proceeds, inter alia, change information for the benefit, inter alia, of contractors, orders, beneficiary, mechanic's, borrower, letter dated, materialmen, laborers, as to the net sum of the building personal knowledge, purportedly, conclusory, loan available for the project. contractual, contingencies, disclosure, shortfall, possessed, lender, viable COUNSEL: Fischbein-Badillo-Wagner, New York, N.Y. (Alan M. Gelb, Pamela A. Phillips, and Barbara Hair of LexisNexis(R) Headnotes counsel), and Goldberg, Kohn, Bell, Black Rosenbloom & Moritz, Ltd., Chicago, Ill. (Terry F. Moritz and Frederic R. Klein of counsel), for third-party defendant-appellant (one brief filed).

Real Property Law > Nonmortgage Liens > Lien Schulte [***2] Roth & Zabel, New York, N.Y. (Mark E. Priorities Kaplan of counsel), for plaintiff-respondent and Real Property Law > Nonmortgage Liens > Mechanics' additional defendant on counterclaim respondent. Liens [HN1] N.Y. Lien Law § 22 provides, in part, that a JUDGES: Thompson, J. P., Sullivan and Friedmann, JJ., building loan agreement, as well as any modification concur. thereof, must be in writing and must show the consideration paid for the loan, all related expenses OPINION incurred or to be incurred in connection with the loan, and the net sum available to the borrower for the [*473] [**912] Ordered that the appeal from the improvement. Amendments to the agreement must be order entered April 18, 1991, is dismissed, as that order filed within ten days after the execution of any such was superseded by the order entered June 28, 1991, made modification. Noncompliance with the disclosure upon renewal and reargument; and it is further, mandate of N.Y. Lien Law § 22 results in the subordination of the Bank's mortgage to the liens [*474] Ordered that the order entered June 28, subsequently filed by those who provided services and 1991, is affirmed insofar as appealed from; and it is materials in connection with the project. further,

Ordered that the respondents are awarded one bill of Contracts Law > Contract Modifications > General costs. Overview Contracts Law > Third Parties > Beneficiaries > The appellant E. W. Howell Construction Corp. General Overview (hereinafter Howell) served as the general contractor on a Real Property Law > Financing > Construction Loans project known as the Wyndam East and Wyndam West, a [HN2] A Lien Law notice is required only with respect to 316-unit condominium complex located in Garden City. material modifications of the agreement. A modification The developer, the Lefcon Partnership (hereinafter of a building loan agreement is material if it: (1) alters the Lefcon), had obtained a building construction loan which rights and liabilities otherwise existing between the allocated some $ 67,500,000 to the so-called "hard parties to the agreement or (2) enlarges, restricts or construction" costs of the project. Pursuant to Lien Law impairs the rights of any third party beneficiary. § 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 Real Property Law > Nonmortgage Liens > Mechanics' documents [***3] detailing the amount of the loan and Liens the various terms of the agreement, including terms [HN3] The disclosure contemplated by the Lien Law is relating to the Bank's obligation to fund the project, the not intended to function as a guarantee that a construction conditions of that obligation, and the rights and remedies project is adequately financed or economically viable. available to both Lefcon and the Bank in connection with Nor does the Lien Law impose upon a lender a the loan. Howell agreed to perform the construction Page 3 209 A.D.2d 473, *474; 618 N.Y.S.2d 910, **912; 1994 N.Y. App. Div. LEXIS 11240, ***3 work for $ 67,850,000. (see, Nanuet Natl. Bank v Eckerson Terrace, supra; HNC Realty Co. v Bay View Towers Apts., 64 AD2d 417). This After the project encountered financial difficulties, Court has held that [HN2] a Lien Law notice is required the Bank and its loan participant, Mitsubishi Trust and only with respect to "material" modifications of the Banking Corporation (hereinafter Mitsubishi), declared agreement (see, HNC Realty Co. v Bay View Towers Lefcon to be in default in connection with the building Apts., supra, at 426). A modification of a building loan loan agreement, and subsequently commenced the instant agreement is " 'material' if it: (1) alters the rights and foreclosure action. Howell was named a third-party liabilities otherwise existing between the parties to the defendant in the foreclosure action by Lefcon and later agreement or (2) enlarges, restricts or impairs the rights interposed an answer containing a "first counterclaim and of any third party beneficiary" ( HNC Realty Co. v Bay cross claim" against the Bank and Mitsubishi, which View Towers Apts., supra, at 426). sought, inter alia, to foreclose on a mechanic's lien in an amount in excess of $ 8,200,000, the sum representing On appeal, Howell argues, inter alia, that the instant labor and materials which Howell had supplied to the building loan agreement obligated the Bank to ensure that project and for which it had received no payment. the loan proceeds would "always" be sufficient to complete the project, and that since the Bank allegedly In its pleading, Howell alleged, among other things, knew from the inception that the project was underfunded that the Bank violated Lien Law § 22 by filing a false and by some $ 10,000,000, [***6] the loan agreement was incomplete building loan agreement, [***4] and misleading and false when filed. Howell further asserts thereafter, by failing to provide written notice of alleged that, although the Bank was aware that the undisbursed modifications [**913] to that agreement. As a loan proceeds were purportedly insufficient to complete consequence, Howell alleged that its lien should be the project, and that Lefcon was unwilling or unable to accorded priority over the Bank's first mortgage. fund the shortfall, the Bank should have, but did not, file modifications to the original loan agreement giving The Supreme Court rejected Howell's arguments, notice of these occurrences. Howell also contends that and granted partial summary judgment to the Bank the Bank modified the agreement without filing a Lien declaring that Howell's mechanic's lien was subordinate Law notice when it did not hold Lefcon in default on to the Bank's first mortgage. Upon Howell's motion for several occasions during the course of the project even reargument and renewal, the court adhered to its original though the agreement would have permitted it to do so. determination. We affirm. According to Howell, the Bank's failure to file [HN1] Lien Law § 22 provides, in pertinent part, that modifications to the agreement in light of these a building loan agreement, as well as any modification developments deprived it of the knowledge that there thereof, must be [*475] in writing and must show the were insufficient funds to complete the job and thus the consideration paid for the loan, all related expenses ability to make a judgment as to whether to continue incurred or to be incurred in connection with the loan, working on the project. "and the net sum available to the borrower for the [*476] Contrary to Howell's suggestions, [HN3] the improvement". Amendments to the agreement "must be disclosure contemplated by the Lien Law is not intended filed within ten days after the execution of any such to function as a guarantee that a construction project is modification." Noncompliance with the disclosure adequately financed or economically viable. Nor does the mandate of Lien Law § 22 results in the subordination of Lien Law impose upon a lender a continuing duty to the Bank's mortgage to the liens subsequently filed by apprise [***7] a contractor of the economic condition of those who provided services and materials in connection its borrower. Rather, it is intended to provide information with the project (see, Nanuet Natl. [***5] Bank v for the benefit, inter alia, of contractors, materialmen, Eckerson Terrace, 47 NY2d 243). laborers, as to the net sum of the building loan available The underlying purpose of Lien Law § 22 is to for the project (see, Nanuet Natl. Bank v Eckerson permit contractors and subcontractors to ascertain how Terrace, supra, 47 NY2d, at 247). That function was much money will be made available to the owner in performed in this case. connection with the project and thus, the ability of the Moreover, the provisions of the agreement on which owner to pay for any services and materials provided Page 4 209 A.D.2d 473, *476; 618 N.Y.S.2d 910, **913; 1994 N.Y. App. Div. LEXIS 11240, ***7

Howell presently relies [**914] with respect to the of action or alleges facts relative to the alleged release of funding of the project outline rights and obligations of funds retained by the Bank. Moreover, Howell submitted Lefcon and the Bank. There is nothing in the agreement nothing of a persuasive nature in support of the retainage which supports Howell's claim that it possesses the status claim in opposition to the original motion for summary of a third-party beneficiary in connection with these judgment and its own cross motion for summary provisions. To the contrary, the agreement specifically judgment. provides that, "[a]11 conditions to the obligations of Bank to make Advances hereunder are imposed solely Nor was the proof submitted by Howell upon and exclusively for the benefit of Bank ... and no other renewal and reargument, sufficient to create material person or entity shall have standing to require satisfaction issues of fact. The evidence submitted by Howell of such conditions ... [or] be deemed to be the beneficiary principally consisted of a post-litigation letter, dated of such conditions". February 27, 1991, from Lefcon's chief financial officer, Irving [***10] Schoenfeld, to Lefcon's counsel, in which In any event, the agreement does not require the Schoenfeld made an elliptical reference to a March 1989 Bank to advance funds beyond its original loan requisition for payment as "the first point at which funds commitment or impose the type of full funding [***8] that could have been retained by Howard were used to guarantee that Howell reads into the document; nor does pay for change orders". it contain a representation that the project could be completed for the loan amount--or for any particular sum. We agree with the Supreme Court that the Further, the agreement does not obligate the Bank to seek Schoenfeld letter, and its reference to "funds" which additional funding from the developer so as to make up "could" have been retained, is lacking in evidentiary any shortfalls which might occur, or to invoke any of its value, inasmuch as it at best, "reflects the conclusory contractual remedies in the event the developer is unable speculative opinion of an officer of the borrower". to contribute additional funds to the project. Rather, the Schoenfeld's letter contains no indication that his agreement merely indicates in relevant part that the Bank statements were premised upon personal knowledge of would, subject to various contingencies, make the the Bank's loan records, or, for that matter, precisely what agreed-upon loan proceeds available to Lefcon in order to the factual basis of his knowledge was. Moreover, in a facilitate construction of the project. Indeed, the subsequently filed affidavit, Schoenfeld himself agreement fully disclosed the range of options the Bank confirmed that he lacked personal knowledge of the possessed in connection with the funding of the project accounting information, indicating instead that he was and the various contingencies under which the Bank merely repeating statements allegedly made to him at could terminate or suspend the making of advances. To some unspecified date by a bank officer during a be sure, the agreement confers upon the Bank various telephone conversation. Schoenfeld's description of these options in connection with the funding of the project and telephone conversations is not only conclusory and bereft also empowers it to take certain actions in the event the of factual background; [**915] his affidavit contains no developer defaults in its obligations. However, the explanation of where or how the Bank officer himself agreement does not require the Bank to exercise any [***11] obtained knowledge, and what role, if any, the particular option in [*477] [***9] pursuing its rights officer played in connection with the management of the under the agreement. Accordingly, the Bank's decision to loan. Further, while Howell relies upon an unsigned exercise--or to refrain from exercising--the rights it letter dated October 11, 1989, in which a Bank official possessed under the agreement cannot be described as a suggests that funds retained had been [*478] released, modification within the meaning of the Lien Law (cf., In Mr. Schoenfeld himself specifically asserted that this re Grossinger's Assocs., 115 Bankr 449, 452-453). letter was a draft which was never sent to, or received by, Lefcon. Howell's additional claim with respect to the Bank's alleged improper release of portions of the approximately Although the foregoing alone establishes that $ 4,000,000 in funds which it had purportedly withheld Howell's application for renewal and reargument with from Howell's progress payments during the course of the respect to the retainage issue was properly rejected, job is conclusory and unsubstantiated. We note that there Schoenfeld's assertions that retainage had been released is nothing in Howell's pleadings which sets forth a cause in March 1989 were undermined by contemporaneous Page 5 209 A.D.2d 473, *478; 618 N.Y.S.2d 910, **915; 1994 N.Y. App. Div. LEXIS 11240, ***11 letters written by Lefcon's principal Lewis Feldman and Additionally, the appellant's attorneys requested Schoenfeld himself. Specifically, in a letter to the Bank permission to conduct further discovery, prior to a final dated September 25, 1989, Feldman stated that "the disposition of the motions, contending that this was simplest way to meet" Lefcon's financial needs "would be necessary to properly rebut the Bank's position, and to fund these requirements from the $ 4,000,000 retainage support its own retainage claims. Although certain of the currently available in the construction loan". Similarly, [*479] documents which purportedly support the in a letter dated October 10, 1989, Schoenfeld himself appellant's position have little probative value standing requested that the Bank release its "$ 4,000,000 alone, specific individuals allegedly involved in the retainage" for the same purpose. Under the pertinent transactions and employed by the Bank have circumstances, we conclude that the Supreme Court been identified in the motion papers. These individuals properly [***12] adhered to the original determination, seemingly have personal knowledge of key facts, or have both in connection with the retainage claim and the access to reliable information on the retainage issue, and additional issues raised upon the motion. Howell should be given the opportunity to examine them under oath. We have reviewed Howell's remaining contentions and find them to be without merit. I further disagree with the Supreme Court's conclusion that the Bank was, in any event, entitled to Thompson, J. P., Sullivan and Friedmann, JJ., release the retainage under the terms of the building loan concur. agreement. The court's conclusion was based on the Bank's contractual right to enter into the premises upon DISSENT BY: Ritter, J. the developer's default, and to use any unadvanced funds to complete the project. Although the developer [***14] DISSENT allegedly had been in default and the Bank arguably could have taken over possession and control of the Ritter, J., Concurs in part and dissents in part and project, it never exercised this remedy. Instead, the Bank votes to dismiss the appeal from the order entered April allowed the developer to remain in possession and 18, 1991, and to modify the order entered June 28, 1991, allegedly entered into a secret agreement modifying the to deny summary judgment in favor of the plaintiff, building loan agreement by allowing funds earmarked as Howard Savings Bank, with the following memorandum: retainage, and designed to secure payment for materials My only disagreement with the well-reasoned analysis of and labor already provided by the appellant, to be used to my colleagues here concerns the majority's disposition fund [**916] change orders. If this alleged agreement with regard to the retainage issue. In my view, the in fact occurred, and resulted in a substantial reduction of conflicting evidence in the record sufficiently raises a funds which the appellant and other mechanic's lienors genuine and material issue of fact; i.e., whether the reasonably expected would be available upon the defendant, Howard Savings Bank (hereinafter the Bank) completion of the project, I believe a supplemental filing improperly disbursed retainage for the payment of change was mandated under Lien Law § 22 (see, Security Natl. orders, a use that is not authorized under the filed Bank v Village Mall, 85 Misc 2d 771, 787). Under the building loan agreement. circumstances, I believe the appellant has asserted a The Bank's position on this key factual issue is not at viable claim that its lien is superior to the Bank's and it all clear. Indeed, during oral argument of the various should be given the opportunity to uncover facts in applications before the Supreme Court, counsel for the support of its position which are in the exclusive [***13] Bank virtually conceded that there was a knowledge of the Bank and the developer. question as to whether retainage had been released early. Exhibit JJ: Lehman Brothers Holding, Inc. V. 25 Broad, LLC 2011 NY slip op319314; 2011 NY Misc. Lexis 3543 Page 1

2 of 56 DOCUMENTS

[**2] LEHMAN BROTHERS HOLDINGS, INC., Plaintiff, - against- 25 BROAD, LLC, KENT M. SWIG, MARJAM SUPPLY CO., INC., STERLING GROUP, ALPHA INTERIORS INC., PINNACLE CONTRACTORS OF NY, INC., SHEHADI COMMERCIAL CARPET & FLOORING, EUROPEAN CONTRACTING GROUP LLC, SEASONS INDUSTRIAL CONTRACTING CORP., SCOUT MECHANICAL, LLC, OLYMPIA PLUMBING & HEATING CORP., SITE SAFETY LLC, ENVIRONMENTAL CONSULTING & MANAGEMENT SERVICES, INC., AMENDOLA MARBLE & STONE CENTER, INC., P.C. RICHARD & SON LONG ISLAND CORP., JD SCAFFOLD INC., COMMERCIAL FLOORING SPECIALIST, LTD. A/K/A COMMERCIAL FLOORING SPECIALISTS, LTD., ALMAR SHEETMETAL INC., INFINITY PAINTING CO. INC., SILK AIR CORPORATION, TRADESOURCE INC., MELE CONTRACTING MANAGEMENT INC., FINE CONSTRUCTION SPECIALTIES LLC, NOVA DEVELOPMENT GROUP INC, STADIUM MARBLE & TILE, INC., LIPPOLIS ELECTRIC, INC., BENCHMARK FURNITURE MANUFACTURING INC., ENVIRONMENTAL CONTROL BOARD OF THE CITY OF NEW YORK, NEW YORK STATE DEPARTMENT OF TAXATION & FINANCE, DOE 1-50", "MARY ROE 1-50," "XYZ CORP. 1-50" AND "ABC, LLC 1-50", The names of the "John Doe 1-50" "MARY ROE 1-60," "XYZ CORP. 1-50" and "ABC, LLC 1-50" Defendants being fictitious and unknown to the Plaintiff, the persons and the entities being parties having an interest in or lien against the premises sought to be foreclosed herein, as owner, tenant, licensee, occupant or otherwise. Defendants.

100886/2009

SUPREME COURT OF NEW YORK, NEW YORK COUNTY

2011 N.Y. Misc. LEXIS 3543; 2011 NY Slip Op 31931(U)

June 13, 2011, Decided June 16, 2011, Filed

NOTICE: THIS OPINION IS UNCORRECTED AND agreement, summary judgment, lienors, recorded, WILL NOT BE PUBLISHED IN THE PRINTED building loan, mechanic's lien, modification, mortgaged OFFICIAL REPORTS. premises, original principal amount, express promise, default judgment, real property, consolidated, declaring, PRIOR HISTORY: Nova Dev. Group, Inc. v. 25 Broad mechanic's, counterclaim, foreclose, lender, promissory LLC, 2010 N.Y. Misc. LEXIS 4495 (N.Y. Sup. Ct., Sept. note, quotation, guaranties, partial, notice, restates, 10, 2010) surplus, amends, mortgaged property

CORE TERMS: mortgage, senior, building loan, loan JUDGES: [*1] Emily Jane Goodman, J.S.C. Page 2 2011 N.Y. Misc. LEXIS 3543, *1; 2011 NY Slip Op 31931(U), **

OPINION BY: Emily Jane Goodman its first counterclaim, and declaring that Seasons' mechanic's lien has priority over plaintiff's mortgages. OPINION BACKGROUND AND FACTUAL ALLEGATIONS [**3] EMILY JANE GOODMAN, JSC.: Plaintiff/Lender is seeking to foreclose on three Plaintiff Lehman Brothers Holdings, Inc. moves for commercial mortgages made in connection with three an order, as mortgagee, pursuant to CPLR 3212, granting commercial loans secured by liens on real property it summary judgment against defendant mortgagor/owner located at 25 Broad Street in New York (property). 25 25 Broad, LLC (25 Broad), giving plaintiff the right to Broad is [*3] the mortgagor and owner of the property. foreclose on the mortgaged premises. Plaintiff seeks Kent M. Swig (Swig) is joined as the guarantor of the attorneys' fees in relation to this action. loans.

Plaintiff also moves for an order, pursuant to CPLR Senior Mortgage: 3212, granting summary judgment against the defendants defined below as the Non-Challenging Lienors, declaring, On March 9, 2007, plaintiff entered into a pursuant to Real Property Law § 291, that the liens of the commercial loan [**5] transaction (Senior Loan) with Non-Challenging Lienors are junior to plaintiff's 25 Broad and Swig in which 25 Broad borrowed and mortgage liens, and dismissing the affirmative defenses agreed to repay the principal sum of $231,677,693.00. of these defendants with respect to the foreclosure. Amended Complaint, ¶ 38. A loan agreement and a restated promissory note were signed which set forth the With respect to the Challenging Lienors, as defined terms and conditions of the loan. Plaintiff states, the below, plaintiff moves for an order, pursuant to CPLR "Senior Loan was fully advanced on March 9, 2007 for 3212 (e), granting it partial summary judgment declaring, the purpose of re-financing the acquisition costs of the pursuant to Real Property Law § 291, that the Senior Mortgaged Property." Slama Affirmation, ¶ 16. The Mortgage has priority over the liens of the Challenging amended and restated loan agreement "amends and Lienors. Plaintiff seeks to sever the remaining claims, restates the original senior loan mortgage which was cross claims and counterclaims of the Challenging executed between plaintiff and 25 Broad Street on August Lienors, and also seeks to dismiss the affirmative 23, 2005 in the amount of $231,677,693.00." Plaintiff's defenses [*2] of such defendants which challenge the Exhibit A, at 5. The promissory note is a consolidation of validity of the priority of the Senior Mortgage. the previous promissory notes secured by previous mortgages. These mortgages include the following: Plaintiff moves, pursuant to CPLR 3215 (a), for a default [**4] judgment against defendants Stadium A) Mortgage in the original principal Marble & Tile, Inc. (Stadium), Environmental Control amount of $7,000,000 made by 25 Broad Board of The City of New York (ECB), and New York Street Realty Corp. to Home Savings State Department of Taxation & Finance (New York Bank, FSB dated 5/30/96 and recorded State). 6/19/96 ... .

Plaintiff requests a referee to ascertain and compute *** the amount due to plaintiff under the various mortgage B) Mortgage in the original principal documents, and to report on whether the mortgaged [*4] amount of $3,865,400 made by Broad premises can be sold in one or more parcels. Street LLC to The Union Labor Life Insurance Company dated 8/14/96 and Plaintiff seeks to have the caption amended to delete recorded 8/20/96 ... . defendants John Doe 1-50, Mary Roe 1-50, XYZ Corp. 1-50 and ABC, LLC 1-50 from the caption. *** C) Building Loan Mortgage, Security Seasons Industrial Contracting Corp. (Seasons) Agreement and Financing Statement in the cross-moves, pursuant to CPLR 3212 (e), for an order original principal amount of $42,134,600 granting partial summary judgment in Seasons' favor on made by Broad Street LLC to The Union Page 3 2011 N.Y. Misc. LEXIS 3543, *4; 2011 NY Slip Op 31931(U), **5

Labor Life Insurance Company dated On March 20, 2007, the Senior Mortgage was 8/14/96 and recorded 8/20/96 ... . recorded in the Office of the City Register of the City of 1. Said mortgage C was assigned by The New York. Union Labor Life Insurance Company to Credit Suisse First Boston Mortgage According to the terms of the loan agreement, the Capital LLC by Assignment of Mortgage "[b]orrower shall use the proceeds of the Senior Loan to dated 12/23/97 and recorded 6/19/98 ... . refinance the existing financing encumbering the D) Replacement Mortgage (A) in the Property (and for no other purpose)." Plaintiff's Exhibit original principal [**6] amount of A, at 24. Plaintiff [**7] states that the Senior Mortgage $6,000,000 made by 21 West LLC to constitutes a first priority lien demonstrating Chase Federal Bank, FSB dated 7/12/96 indebtedness under the Senior Loan. and recorded 9/6/96 ... . Building Mortgage: *** E) Replacement Mortgage (B) in the On March 9, 2007, 25 Broad and Swig executed a original principal amount of $9,000,000 commercial building loan transaction (Building Loan) by made by 21 West LLC to Chase Federal which 25 Broad borrowed and agreed to [*6] repay Bank, FSB dated 7/12/96 and recorded plaintiff $19,633,826.00, plus interest. A Building Loan 9/6/96 ... . Agreement, explaining the terms of the Building Loan, was signed and filed on March 22, 2007 with the New *** York County Clerk Records Office. According to the F) Mortgage in the original principal Building Loan Agreement, in pertinent part: amount of $7,000,000 made by Broad Street LLC to Credit Suisse First Boston Borrower shall use the proceeds of the Mortgage Capital LLC dated 12/23/97 and Building Loan to pay or reimburse itself recorded 6/19/98 ... . for Hard Costs actually incurred in connection with the construction and *** renovation of the Project Improvements if G) Mortgage in the original principal and to the extent that such Building Loan amount of $161,627,157.82 made by 25 Costs are reflected in the Building Loan Broad, LLC to Lehman Brothers Holdings Budget, subject to reallocation pursuant to Inc. dated 8/23/2005 and recorded [*5] this Agreement ... ." 9/30/05 ... . Plaintiff's Exhibit F, at 35. *** 1. Said mortgages A through G were Along with the Building Loan, plaintiff filed a notice consolidated to form a single lien of of lending on March 13, 2007 with the New York County $231,677,693 by Consolidation and Clerk's Office. The notice of lending set forth the Extension Agreement made between 25 maximum amount allowed for improvement of the Broad, LLC and Lehman Brothers property as $19,633,826.00, and also identified Holdings Inc. dated 8/23/2005 and $8,991,379.60 of the Building Loan as being advanced recorded 9/23/2005 ... . prior to March 9, 2007. Plaintiff's Exhibit I, at 1.

Amended Complaint, Schedule 1, at 50-53. Along with the Building Loan Agreement and the promissory note, 25 Broad, as mortgagor, executed and In connection with the other Senior Loan documents, delivered to plaintiff a Building Mortgage in the amount 25 Broad signed and returned to plaintiff a mortgage and of $19,633,826.00. The [**8] Building Mortgage related documents (Senior Mortgage) in the same consolidates, [*7] amends and restates the original principal amount of $231,677,693.00. The Senior principal amount of $19,633,826.00 which was lent to 25 Mortgage is a consolidation of the previous mortgages as Broad from plaintiff on August 23, 2005. Amended set forth in Schedule 1 above. Complaint, ¶ 60. The original building loan was recorded Page 4 2011 N.Y. Misc. LEXIS 3543, *7; 2011 NY Slip Op 31931(U), **8

on September 30, 2005 in the Office of the City Register Various contractors and subcontractors provided of the City of New York. labor, material and/or equipment for construction on the property, and were not paid in full for their [*9] services. The Building Mortgage, along with accompanying They filed mechanic's liens with the New York County documents, was filed with the Office of the City Register Clerk in 2008 and 2009. These mechanic's lienors were of the City of New York on March 20, 2007. Plaintiff named as parties in the above action. Some of the lienors labels the Building Mortgage as a second priority lien served notices of appearance and/or challenged the lien demonstrating the indebtedness due under the Building priority of plaintiff's mortgages. Fine [**10] Loan Agreement. Amended Complaint, ¶ 61. Construction Specialties, LLC settled with plaintiff. A default judgment was issued October 30, 2009 against Protect Mortgage: Site Safety, LLC, Almar Sheetmetal Inc., Infinity Also on March 9, 2007, plaintiff entered into a Package Co. Inc., Silk Air Corporation, and Tradesource, commercial project loan transaction (Project Loan) with Inc. but that judgment did not prohibit said defendants 25 Broad and Swig in which 25 Broad borrowed and from claiming a share of any surplus proceeds. agreed to repay the principal sum of $26,658,481.00. In response to plaintiff's motion, 10 mechanic's Amended Complaint, ¶ 71. A loan agreement and a lienors have submitted opposition papers. These include: restated promissory note were signed which set forth the Seasons, Amendola Marble & Stone Center, Inc. terms and conditions of the loan. The promissory note (Amendola), Alpha Interiors, Inc., Commercial Flooring consolidates, amends, and restates the original amount of Specialists, Ltd. (Commercial), Pinnacle Contractors of $26,658,481.00 made by plaintiff to 25 Broad in August NY, Inc., European Contracting Group, LLC, Olympia 23, 2005 and recorded on September 30, 2005 with the Plumbing & Heating Corp., Benchmark Furniture Office of the City Register of the City of New York. Id., Manufacturing Inc., Lippolis Electric, Inc. (Lippolis), ¶ 74. Mele Contracting Management, Inc. (collectively, 1 Along [*8] with the Project Loan Agreement and the Challenging Lienors). promissory note, 25 Broad, as mortgagor, executed and 1 Although plaintiff claims that Amendola did delivered to plaintiff a Project Mortgage in the amount of not raise any challenge to the priority of plaintiff's $26,658,481.00. The Project [**9] Mortgage mortgages in its answer, [*10] the record consolidates, amends and restates the original principal indicates that Amendola's answer did submit a amount of $26,658,481.00 which was lent to 25 Broad challenge to plaintiff's priority. from plaintiff on August 23, 2005, and recorded on September 30, 2005 with the Office of the City Register Seasons cross-moves, pursuant to CPLR 3212 (e), of the City of New York. Id., ¶ 77. The Project Mortgage, for an order granting partial summary judgment in along with its accompanying documents, was recorded on Seasons' favor on its first counterclaim, and declaring that March 20, 2007 with the Office of the City Register of Seasons' mechanic's lien has priority over plaintiff's the City of New York. mortgages. Seasons' counterclaim seeks to enforce its lien in the amount of $1,489,990.50, plus interest. Amendola Plaintiff states that the Project Mortgage is a third is represented by the same counsel and joins in Seasons' priority lien which demonstrates the indebtedness under motion. the Project Loan. [**11] All of the other Challenging Lienors except 25 Broad defaulted on the terms of the various loan for Commercial, state in their opposition papers that they documents, and owes plaintiff at least $270,000,000.00. join in the opposition to plaintiff's motion for summary On November 25, 2009, plaintiff filed a summons judgment submitted by Seasons and Amendola. and complaint seeking to foreclose on the three The Non-Challenging Lienors include the following: commercial mortgages made in connection with the three Marjam Supply Co., Inc., Sterling Group, Shehadi commercial loans, along with other related relief. Commercial Carpet & Flooring, Scout Mechanical, LLC, Mechanic's Lienors Environmental Consulting & Management Services, Inc., P.C. Richard & Son Long Island Corp., JD Scaffold Inc., Page 5 2011 N.Y. Misc. LEXIS 3543, *10; 2011 NY Slip Op 31931(U), **11

and Nova Development Group, Inc. before any of the mechanic's lienors', thereby entitling plaintiff to priority on its Senior Mortgage, pursuant to Plaintiff argues that its Senior Mortgage has priority Lien Law § 13 (1). over all of the other mechanic's liens since it was filed on March 20, 2007, which is prior to any of the other liens [**13] Seasons argues that plaintiff's "so-called being filed. Plaintiff explicitly states that [*11] the Senior Mortgage is really a building loan contract that Senior Mortgage is the only mortgage upon which it was required to be filed with the New York County seeks to foreclose by way of this motion for partial Clerk's Office" pursuant to Lien Law § 222. Rothman summary judgment, and requests that the court not decide Affirmation, ¶ 17. In addition, Seasons maintains that the the issue of the priority of the Building Mortgage and the Senior Mortgage is a building loan contract because any Project Mortgage. The Challenging Lienors claim that the default in the Completion Guaranty dated March 9, 2007 Senior Mortgage is really a building loan contract or (executed simultaneously with the amendment [*13] and building loan mortgage which requires additional filings restatement of the Senior Mortgage), such as not pursuant to Lien Law § 22. Since plaintiff did not make completing improvements, constitutes a default under the these filings, the Challenging Lienors believe that their Senior Mortgage, and, because a promise to make liens should have priority over the Senior Mortgage. The improvements is implied in the Senior Mortgage because Challenging Lienors request that the court decide the 25 Broad would be in default under the Senior Mortgage, priority of all three mortgages. if it defaulted under the Building Loan Agreement. Given that no filing was made pursuant to Lien Law §22, DISCUSSION Seasons maintains that its liens (as well as the other mechanic's lienors'), have priority over the Senior [**12] I. Summary Judgment: Mortgage.

"The proponent of a motion for summary judgment 2 At times, Seasons uses the terms building loan must demonstrate that there are no material issues of fact mortgage and building loan contract in dispute, and that it is entitled to judgment as a matter interchangeably. A building loan mortgage is of law." Dallas-Stephenson v Waisman, 39 AD3d 303, made pursuant to a building loan contract. Lien 306, 833 N.Y.S.2d 89 (1st Dept 2007), citing Winegrad v Law § 22's filing requirement only applies to a New York Univ. Med. Ctr., 64 NY2d 851, 853, 476 building loan contract. N.E.2d 642, 487 N.Y.S.2d 316 (1985). Upon proffer of evidence establishing a prima facie case by the movant, Seasons further argues that the Senior Mortgage is a "the party opposing a motion for summary judgment building loan mortgage because it consolidates the liens bears the burden of 'produc[ing] evidentiary proof in of multiple mortgages from 1996, one of which was a admissible form sufficient to require [*12] a trial of building loan mortgage. Since no building loan contract material questions of fact.'" People v Grasso, 50 AD3d was filed, Seasons claims that its liens have priority over 535, 545, 858 N.Y.S.2d 23 (1st Dept 2008), quoting the Senior Mortgage. Rothman Affirmation, ¶ 25. As Zuckerman v City of New York, 49 NY2d 557, 562, 404 Seasons sets forth, citing to [**14] Atlantic Bank of New N.E.2d 718, 427 N.Y.S.2d 595 (1980). In considering a York v Forrest House Holding Co. (234 AD2d 491, 492, summary judgment motion, evidence should be viewed in 651 N.Y.S.2d 607 [2d Dept 1996]), where a loan [*14] is the "light most favorable to the opponent of the motion." partly a building loan and partly an acquisition loan, the Id. at 544, citing Marine Midland Bank, N.A. v Dino & entire loan is subject to the filing requirements of Lien Artie's Automatic Transmission Co., 168 AD2d 610, 563 Law § 22. Any failure to make the requisite filings N.Y.S.2d 449 (2d Dept 1990). The function of the court subordinates the entire loan. Id. Similarly, Commercial is one of issue finding, not issue determination. Ferrante argues that the three 2007 mortgages were consolidated v American Lung Assn., 90 N.Y.2d 623, 630, 687 N.E.2d into one mortgage, thereby morphing them into a 1308, 665 N.Y.S.2d 25 (1997). building loan contract. Although plaintiff seeks to have Commercial's opposition and amended answer with Senior Mortgage: counterclaim rejected as untimely, Commercial's late Plaintiff argues that the Senior Mortgage is not a service of papers does not prejudice plaintiff and is 3 building loan contract and was properly recorded well excused. Page 6 2011 N.Y. Misc. LEXIS 3543, *14; 2011 NY Slip Op 31931(U), **14

3 Likewise, plaintiff seeks to have Lippolis's mortgage to the subsequently filed liens. Id. opposition rejected as untimely. The court accepts Lippolis's, opposition and notes that it was only This court is not persuaded that the plaintiff's Senior untimely by a matter of days. Mortgage is a really a building loan contract or a building loan mortgage. Contrary to Commercial's contentions, the Plaintiff maintains that these arguments have no record indicates that plaintiff's mortgages remain three merit because the definition of building loan contract separate liens [**16] on the property, and were never precludes a finding that the Senior Mortgage is a building consolidated. loan contract because the Senior Mortgage does not contain any requirement that 25 Broad perform any work The purpose of filing a building loan contract is to on the premises, and that there is no provision that the "permit contractors and subcontractors to ascertain how funds were to be advanced as the work progressed. much money will be made available to the owner in connection with the project and thus, the ability of the Lien Law § 2 (14) defines a "building loan owner to pay for any services and materials provided." mortgage" as, "a mortgage made pursuant to a building Howard Savings Bank v Lefcon Partnership, 209 AD2d [*15] loan contract and includes an agreement wherein at 475. and whereby a building loan mortgage is consolidated with existing mortgages so as to constitute one lien Courts have interpreted a building loan contract to be [**15] upon the mortgaged property." "an agreement to provide a loan for the purpose of erecting a building and to be advanced in installments Lien Law § 2 (13) defines a "building loan contract" from time to time as might be rendered safe by the as the following, in pertinent part: condition of the building [internal quotation marks and citations omitted]." Alden State Bank v Sunrise Builders, a contract whereby a party thereto, in Inc., 48 AD3d 1162, 1164, 853 N.Y.S.2d 230 (4th Dept this chapter termed "lender," in 2008). consideration of the express promise of an owner to make an improvement upon real The [*17] Senior Mortgage, as evidenced by its property, agrees to make advances to or language, does not meet the definition for a building loan for the account of such owner to be mortgage or a building loan contract under the Lien Law. secured by a mortgage on such real First and foremost, the Senior Mortgage did not advance property, whether such advances represent any funds for the purpose of making improvements to the moneys to be loaned or represent moneys property. As set forth in the loan agreement, according to to be paid in purchasing from or in selling the terms of the loan agreement, the "[b]orrower shall use for such owner bonds or certificates the proceeds of the Senior Loan to refinance the existing secured by such mortgage upon such real financing encumbering the Property (and for no other property ... . purpose)." Exhibit A, at 24. Second, the funds were provided to 25 Broad in one lump sum. As plaintiff states, the funds were fully advanced on March 9, 2007. Lien Law § 22 requires the filing of the building loan contract with the New York County Clerk's Office; [**17] As the Court held in Pawling Savings Bank otherwise other liens will have priority over this contract. v Jeff Hunt Properties, Inc. (225 AD2d 678, 679, 639 As summarized in Howard Savings Bank v Lefcon N.Y.S.2d 462 [2d Dept 1996]), "[a] building loan Partnership (209 AD2d 473, 474-475, 618 N.Y.S.2d 910 agreement is an agreement by which one undertakes to [2d Dept 1994]), Lien Law § 22 states, in pertinent part, advance another money to be used primarily in the that a "building loan agreement, as well as any erection of a building and not merely to pay existing modification thereof, must be in writing and must show mortgages and bonuses to the lender for making the loan the consideration paid for the loan, [*16] all related [internal quotation marks and citation omitted]." expenses incurred or to be incurred in connection with Moreover, although the definition of building loan the loan, and the net sum available to the borrower for the mortgage under Lien Law §2 (14) "includes an agreement improvement [internal quotation marks omitted]." Failing wherein and whereby a building loan mortgage is to comply with the filing requirements subordinates the consolidated [*18] with existing mortgages so as to Page 7 2011 N.Y. Misc. LEXIS 3543, *18; 2011 NY Slip Op 31931(U), **17

constitute one lien upon the mortgaged property" and one under the Building Loan, but also guaranties other of the many mortgages which were consolidated in 2005 obligations under the Senior Loan, the Guaranty included a building loan mortgage dated August 14, transforms the Senior Mortgage into a building loan 1996, the mortgage still must be made pursuant to a contract. Additionally, the fact that 25 Broad would be in building loan contract under Lien Law §2 (14). That in default under the Senior Mortgage if it defaulted under turn requires "the express promise of an owner to make the Building Loan Agreement does not suggest that 25 an improvement upon real property" under Lien Law §2 Broad had an express promise to make improvements. As (14). Here, there is no evidence of any express promise the Court held in Amsterdam Savings Bank v Terra (or of a continuing promise) in the Senior Mortgage, Domus Corp. (97 AD2d at 44, supra "[a] review of the made by the owner to improve the real property, and, documents related to this transaction . . . reveals that presumably, all of the funds to be advanced in 1996 there was no express promise by [Owner] to improve under the building loan mortgage dated August 14, 1996, property, a promise which is required for there to be a were already advanced. See Amsterdam Savings Bank v 'building loan contract.' [T]he documents . . . [are] merely Terra Domus Corp., 97 AD2d 41, 44, 470 N.Y.S.2d 448 a mortgage note and mortgage which contain provisions (3d Dept 1983) (Lien Law §22 statement not required for usually associated with a permanent loan." a loan of $50,000, even though that loan was consolidated under one mortgage with two other loans Seasons argues that the plaintiff's motion is that [**18] advanced money for improvements, because premature since there is outstanding discovery. However there was no express promise to improve the property). Seasons cannot defeat summary judgment merely by This is consistent with the Court's interpretation as set claiming a lack of discovery. Seasons, nor the other forth in Atlantic Bank of New York v Forrest House Challenging Lienors, [*21] have not shown that any facts Holding Co. (234 AD2d 491, 651 N.Y.S.2d 607, supra), exist, which cannot be stated at this time, that would the case cited to by Seasons, which [*19] penalizes the defeat summary judgment. Frierson v Concourse Plaza lender for "shirking" the responsibility of its Lien Law § Associates, 189 AD2d 609, 610, 592 N.Y.S.2d 309 (1st 22 filing requirements. Id. at 492. Plaintiff here did not Dept 1993), citing CPLR 3212 (f). "The mere hope of "shirk" its responsibility to inform the contractor what defendants that evidence sufficient to defeat such a sum of money was available under the loan for the [**20] motion may be uncovered during the discovery project, since the funds advanced in the Senior Mortgage process is not enough [internal quotation marks and were used for the sole and exclusive purpose of citation omitted]." Id. See also Amsterdam Savings Bank refinancing the existing mortgage debt and no additional v Terra Domus Corp. (97 AD2d at 45), "[t]here is no funds were being advanced, either in 2005 or as amended evidence to show that what [defendant] is seeking may in 2007, for the purpose of improving the property. See In actually exist and CPLR 3212 (subd [f]) does not permit re 455 CPW Associates, 192 B.R. 85, 90 (Bankr SD NY fishing expeditions." Moreover, Seasons itself has 1996), affd 1999 WL 675972, 1999 US Dist. LEXIS cross-moved for summary judgment on the same issues 13306 (SD NY 1999), affd 225 F3d 645 (2d Cir 2000)("it of lien priority. is clear from the relevant loan documents that the Greater Loan is not a Building Loan Contract within the meaning Accordingly, as no issues of fact remain, the Senior of section 22 of the Lien Law. Moreover, the purpose Mortgage, being duly filed on March 20, 2007, has behind the Lien Law statutes has not been subverted priority over all of the later-filed mechanic's liens. As here"). Accordingly, the argument that the Senior such, plaintiff is granted summary judgment declaring Mortgage is subordinate to their liens because it is really priority of its Senior Mortgage to the later-filed a building loan mortgage subject to the requirements of mechanic's liens, and Seasons is denied summary Lien Law §22, by virtue of the consolidation with the judgment with respect to the Senior Mortgage. 1996 building loan, is unpersuasive. Building Mortgage:4

Likewise, Seasons' other arguments regarding the 4 Despite plaintiff's belief that the court "should Senior [**19] Mortgage, [*20] which have not been not waste its time and resources on the addressed by plaintiff, are without merit. Seasons cites no hypothetical question [*22] of priority" unless authority for its argument that, because the Completion there are surplus proceeds from the sale of the Guaranty guaranties completion of the improvements mortgaged property (Mizrahi Affirmation, ¶ 44), Page 8 2011 N.Y. Misc. LEXIS 3543, *22; 2011 NY Slip Op 31931(U), **20

there is no reason to delay decision regarding the it is irrelevant if a building [*24] loan agreement priority of the Building Mortgage and Project was filed in 2005. Plaintiff filed a Building Loan Mortgage, as no evidence has been submitted as Agreement with the New York County Clerk's to the likelihood of any surplus. Office in 2007, which was prior to the filing of the mechanic's liens. Seasons argues that it and the other mechanic's lienors are entitled to priority over the Building Mortgage Project Mortgage: since the alleged modifications have not been filed with the New York County Clerk as required by Lien Law § Seasons argues that its mechanic's liens should have 22. As an example of an alleged material modification, priority over the Project Mortgage since plaintiff's Project Seasons provides a letter written on May 23, 2008, from Loan Agreement is really a building loan agreement, plaintiff to 25 Broad. The letter refers to a [**21] subject to additional filing requirements which were not schedule of direct advances, which is not attached as an made with the New York County Clerk because the terms exhibit. The letter purportedly addresses the way that the therein provide for payments in consideration for making funds were to be disbursed. As a result, Seasons claims improvements. that this may impact the availability of funds to pay for the project. Seasons also attaches other written Seasons points to section 2.8.3 of the Project Loan correspondence between plaintiff and 25 Broad and Swig. Agreement (among other sections) which states in pertinent part: Seasons also claims that it is impossible to determine if the original 2005 Building Mortgage was filed as 2.8.3 Conditions of Final Construction required under Lien Law § 22. Advance. (d) Payment of Costs: Evidence satisfactory to Lender that all sums due in Lien Law § 22 requires that any modification to the connection with the construction of the building loan [*23] agreement "must be filed within ten Project Improvements have been paid in days after the execution of any such modification." If a full (or will be paid out of the funds modification is material, the failure to file the requested to be advanced) and that no modification entitles subsequently filed mechanic's liens party claims or has a right to claim any priority over the building loan mortgage. Howard statutory or common law lien arising out Savings Bank v Lefcon Partnership, 209 AD2d at 475. A of the construction of the Project modification is material if it either "(1) alters the rights Improvements or the supplying of labor, and liabilities otherwise existing between the parties to material, and/or services in connection the agreement or (2) enlarges, restricts or impairs the therewith. rights of any third party beneficiary [internal quotation marks and citation omitted]." Id. Plaintiff's Exhibit J, at 53.

Plaintiff claims that none of the letters relied on by [**23] Project Improvements are [*25] defined in Seasons contains any language which modifies the terms the Project Loan Agreement as "the renovation and of the Building Mortgage. Plaintiff avers that the letters construction work shown on the Plans and Specifications, were either protective advance letters, reservations of as the same will be constructed in all material respects in rights letters or [**22] minutes of meetings, all of which accordance with the Plans and Specifications and all contained written confirmation that no modifications Legal Requirements." Id. at 22. were made. Plaintiff claims that the proceeds of the Project Seasons has not demonstrated that the evidence Mortgage were for related project costs that were not submitted indicates that there was a material modification costs of the improvement on the Mortgaged Premises and therefore, summary judgment is denied on this based on its attorney's statement. Slama Affirmation, ¶ 8. issue.5 Plaintiff also contends that the Project Mortgage has no express promise to improve the property, and points to a 5 Since the 2007 Building Mortgage amends and treatise that defines a project loan mortgage as one that restates all prior agreements between the parties, secures advances for "development-related costs" that do Page 9 2011 N.Y. Misc. LEXIS 3543, *25; 2011 NY Slip Op 31931(U), **23

not pay for improvements (Reply Mem at 20). Seasons Plaintiff is entitled to recover reasonable attorneys' points out that the definition of building loan contract fees pursuant to the loan documents. See e.g. Plaintiff's under Lien Law §2 (13) does not distinguish between Exhibit 1-C, at 7.1 (h)(vii). "hard costs" and "soft costs" as the only relevant criteria is whether money is advanced in consideration of an A referee shall be appointed to examine and report express promise of an owner to make "an improvement on how the parcel should be sold and to ascertain the upon real property." amounts due to the plaintiff under the Senior and Building Loan documents. The court finds that Seasons has properly pled that the Project Mortgage is really a building loan contract. Plaintiff's Request for Default Judgment Against ECB, Even if not labeled a building loan contract, [*26] the New York Site arid Stadium: Project Mortgage can still be denominated as a building loan contract if it meets the Lien Law's requirements of a Plaintiff has served ECB, New York State and building loan. See Lincoln First Bank, N.A. v Spaulding Stadium with the complaint. None of these parties has Bakeries, Inc., 117 Misc 2d 892, 459 N.Y.S.2d 696 (Sup answered the complaint, nor have they sought additional Ct, Broome [**24] County 1983). Plaintiff avers that time to do so. Plaintiff requests that a default judgment be the proceeds for the project mortgage were not to be used entered [*28] against these defendants declaring that any for improvement of the mortgaged premises but were to of these defendants' interest is junior to plaintiff's be used for other projects. However, plaintiff provides no mortgage liens and that they are barred from any share of evidence as to what these projects were. the mortgaged premises but are not barred from any surplus proceeds, if any. As previously mentioned, Lien Law § 2 (13) defines a "building loan contract" as one where the lender agrees Since Stadium has failed to answer the complaint or to advance money to the owner in consideration for appear and plaintiff has demonstrated a prima facie case making improvements to the property. Improvements are that Stadium's mechanics lien is junior to the Senior defined under Lien Law §2 (4). There can be no dispute Mortgage, a default judgment is granted against Stadium, that the Project Loan Agreement provides for loan but it is not prohibited from sharing in any surplus. payments, in consideration of making improvements to However, a default judgment is [**26] denied against the property, as that term is used under the Lien Law. ECB and New York State because plaintiff has not made Accordingly, the Project Loan Agreement is a building any effort to demonstrate that the Senior Mortgage is loan contract, and, because it was not filed with the New superior to these liens (including what appears to be a tax York County Clerk, the Project Mortgage is subordinate lien on the property). to the mechanic's liens. Various Other Relief:

Seasons and the other Challenging Lienors are Seasons argues that plaintiff's motion should be granted summary judgment with respect to the priority of denied because plaintiff did not attach copies of its their liens [*27] over the plaintiff's Project Mortgage. replies to Seasons' and some other defendants' Summary Judgment on the Foreclosure Action: counterclaims to the motion. The court is not persuaded by this argument. Plaintiff has cured any potential alleged Plaintiff seeks to foreclose on the mortgaged defects in its pleadings and this alleged defect has not premises to recover debt due under the three loans. 25 prejudiced the defendants in any way. See CPLR 2001 Broad admits that it defaulted on the loans and consents ("[a]t any stage of an action, including the filing of a to summary judgment being granted in plaintiff's favor. summons [*29] with notice, summons and complaint or Swig affirms this information. Accordingly, plaintiff is petition to commence an action, the court may permit a granted summary judgment with respect [**25] to mistake, omission, defect or irregularity . . . if a foreclosing on the mortgaged premises. However, as a substantial right of a party is not prejudiced . . ."). result of this decision, plaintiff is only granted summary judgment foreclosing on the Senior Mortgage and the Since plaintiff has ascertained that no other parties, Building Mortgage. other than the defendants served, have an interest in the property, the caption is amended to delete defendants Page 10 2011 N.Y. Misc. LEXIS 3543, *29; 2011 NY Slip Op 31931(U), **26

John Doe 1-50, Mary Roe 1-50, XYZ Corp. 1-50 and priority of their liens over the Building Mortgage and are ABC, LLC 1-50. granted summary judgment with respect to the priority of their liens over the Project Mortgage. CONCLUSION A default judgment against defendants Stadium Accordingly, the foreclosure motion for summary Marble & Tile is granted as described herein but is denied judgment brought by plaintiff is granted to the extent of as to Environmental Control Board of The City of New allowing plaintiff to foreclose on the mortgaged premises York and New York State Department of Taxation & as set forth in [**27] the decision, granting reasonable Finance. attorneys' fees in connection with this action, and appointing a referee to compute the amount due for The caption is amended to delete defendants John principal and interest and to determine if the mortgaged Doe 1-50, Mary Roe 1-50, XYZ Corp. 1-50 and ABC, premises can be sold in one or more parcels, as well as to LLC 1-50. determine the amount of attorneys' fees owed. Submit proposed Order on Notice. Plaintiff's motion for partial summary judgment, declaring, pursuant to Real Property Law § 291, that the This Constitutes the Decision and Order of the Court. Senior Mortgage has priority over the liens of the Challenging and Non-Challenging Lienors, is granted in Dated: June 13, 2011 its entirety. ENTER

Seasons and the other Challenging Lienors are J.S.C denied summary [*30] judgment with respect to the Exhibit KK: Yankee Bank for Finance and Savings, FSB v. Task Associates et al. 731 F. Supp. 64

Exhibit LL: Atlantic Bank of New York v. Forrest House Holding Company et al. 651 N.Y.S. 2d 607

(Note: Not followed by Court of Appeals in Altshuler Shaham Provident Fund, Ltd v. GML Tower LLC 21 N.Y.3d 352, Exhibit MM herein) Page 1

1 of 52 DOCUMENTS

Atlantic Bank of New York, Appellant, v. Forrest House Holding Company et al., Defendant, and Atlas Building Systems, Inc., et al., Respondents.

95-09873

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

234 A.D.2d 491; 651 N.Y.S.2d 607; 1996 N.Y. App. Div. LEXIS 13179

November 22, 1996, Argued December 23, 1996, Decided

PRIOR HISTORY: [***1] In a mortgage loan contracts with or without the sale of land. The court foreclosure action, the plaintiff appeals, as limited by its found that applying a liberal construction of the language brief, from so much of an order of the Supreme Court, was consistent with the overriding concern that the lender Queens County (LeVine, J.), dated September 13, 1995, was the party responsible for compliance and that the as denied that branch of its motion which was for partial threat of losing priority was an effective deterrent against summary judgment against the defendants Atlas Building lenders shirking responsibility. The court found that Systems, Inc.; Teman Electrical Contracting, Inc.; summary judgment was properly denied. Valente Industries, Inc.; Skyline Steel Corp.; Super-Structures, Inc.; McNally & McNally, Inc.; OUTCOME: The court affirmed the order of the lower De-Con Mechanical Contractors, Inc.; Howard Z. Lieb & court with costs. Company, Inc.; and JMR Concrete of Long Island Corp. CORE TERMS: mechanic's liens, mortgage, summary CASE SUMMARY: judgment, lender, loan proceeds, building loan, sale of land

PROCEDURAL POSTURE: Appellant bank sought LexisNexis(R) Headnotes review of an order of the Supreme Court, Queens County (New York), which denied its motion for partial summary judgment against respondents, mechanic's lien holders, in the bank's foreclosure action. Commercial Law (UCC) > Secured Transactions OVERVIEW: The bank contended that the amount of its (Article 9) > Priority > General Overview mortgage that secured loan proceeds apportioned for the Real Property Law > Financing > Construction Loans purchase of property was outside the scope of N.Y. Lien Real Property Law > Purchase & Sale > Contracts of Sale > Formalities Law § 22, which made an unfiled mortgage subject to filed liens, and therefore they were entitled to partial [HN1] Pursuant to N.Y. Lien Law § 22, a building loan summary judgment. The court found that partial summary contract, with or without the sale of land, and any judgment was properly denied. The court held that the modification thereto, must be in writing and must be filed subordination provision of the statute applied to building with the county clerk of the county in which any part of Page 2 234 A.D.2d 491, *; 651 N.Y.S.2d 607, **; 1996 N.Y. App. Div. LEXIS 13179, ***1 the land is situated. If not so filed the interest of each inter alia, counterclaimed to foreclose or enforce their party to such contract in the real property is subject to the respective mechanic's liens. The plaintiff moved, inter lien and claim of a person who shall thereafter file a alia, for summary judgment against [***2] them on the notice of lien under this chapter. ground that its recorded mortgage had priority over their mechanic's liens, at least to the extent of the $ 2,200,000 loan given by it to the defendant Forrest House Holding Commercial Law (UCC) > Secured Transactions Company for land acquisition. The court denied that (Article 9) > Priority > General Overview branch of the plaintiff's motion, and the plaintiff appeals. Real Property Law > Financing > Construction Loans Real Property Law > Nonmortgage Liens > Lien [HN1] Pursuant to Lien Law § 22, a building loan Priorities contract, with or without the sale of land, and any [HN2] The subordination provision of N.Y. Lien Law modification thereto, must be in writing and must be filed §22 applies to building loan contracts either with or with the County Clerk of the county in which any part of without the sale of land. the land is situated. "If not so filed the interest of each party to such contract in the real property ... is subject to Contracts Law > Secured Transactions > Perfection & the lien and claim of a person who shall thereafter file a Priority > Priority > Liens > Mechanics' Liens notice of lien under this chapter" (Lien Law § 22). It is Governments > Legislation > Interpretation the plaintiff's contention that so much of its mortgage as Real Property Law > Financing > Secondary Financing secured the loan proceeds apportioned for the purchase of > Lien Priorities the property is outside the scope of Lien Law § 22, and [HN3] Applying a liberal construction to N.Y. Lien Law that it was therefore entitled to summary judgment § 22, the language implies that if a lender fails to comply against the respondents, the holders of various mechanic's with the requirements of the Lien Law, its entire liens. We find that summary judgment was properly mortgage, including that part securing loan proceeds denied. advanced for the purchase of the property, would become [**608] [HN2] The subordination provision of Lien subordinate to any subsequently filed mechanic's liens. Law § 22 applies to building loan contracts "either [***3] This interpretation is consistent with the overriding with or without the sale of land". [HN3] Applying a concern that the lender is the party responsible for liberal construction to this provision (see, [*492] Lien compliance and that the threat of the loss of priority is an Law § 23), the language implies that if a lender fails to effective deterrent against a lender shirking this comply with the requirements of the Lien Law, its entire responsibility. mortgage, including that part securing loan proceeds advanced for the purchase of the property, would become COUNSEL: Bachner, Tally, Polevoy & Misher, LLP, subordinate to any subsequently filed mechanic's liens. New York, N.Y. (Richard S. Fries, Todd C. Steckler, and This interpretation is consistent with the overriding Todd B. Marcus of counsel), for appellant. concern that the lender is the party responsible for Altieri, Kushner, Miuccio & Frind, New York, N.Y. compliance and that the threat of the loss of priority is an (Albert S. Tablante and Denis B. Frind of counsel), for effective deterrent against a lender shirking this respondents. responsibility (see, Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243, 248). To the extent that this JUDGES: Copertino, J. P., Joy, Krausman and outcome may be harsh, "it must be understood that we are McGinity, JJ., concur. here dealing not with equitable redress, but with a statutorily imposed penalty" ( HNC Realty Co. v Golan OPINION Hgts. Developers, 79 Misc 2d 696, 703).

[*491] [**607] Ordered that the order is affirmed Copertino, J. P., Joy, Krausman and McGinity, JJ., insofar as appealed from, with costs. concur.

In this mortgage foreclosure action, the respondents, Exhibit MM: Altshuler Shaham Provident Fund, Ltd v. GML Tower LLC 21 N.Y. 3D 352 Page 1

1 of 55 DOCUMENTS

Altshuler Shaham Provident Funds, Ltd., Appellant, v GML Tower, LLC, et al., Defendants, The Pike Company, Inc., et al., Respondents.

No. 115

COURT OF APPEALS OF NEW YORK

21 N.Y.3d 352; 995 N.E.2d 110; 972 N.Y.S.2d 148; 2013 N.Y. LEXIS 1466; 2013 NY Slip Op 4273

May 2, 2013, Argued June 11, 2013, Decided

NOTICE: foreclosure action, which subordinated appellant mortgagee's successor's lien to their mechanic's liens. The THE LEXIS PAGINATION OF THIS DOCUMENT appellate court affirmed. The trial court issued a IS SUBJECT TO CHANGE PENDING RELEASE OF foreclosure judgment. The successor's appeal was THE FINAL PUBLISHED VERSION. THIS dismissed by the Supreme Court, Appellate Division, OPINION IS UNCORRECTED AND SUBJECT TO New York. The successor was granted leave to appeal. REVISION BEFORE PUBLICATION IN THE OFFICIAL REPORTS. OVERVIEW: The state's highest court held that the 2007 loan agreement was a building loan contract under SUBSEQUENT HISTORY: Reargument denied by, Lien Law § 2(13). The successor never filed the 2007 Motion denied by Altshuler Shaham Provident Funds, loan agreement as required by Lien Law § 22, but Ltd. v. GML Tower, LLC, 21 N.Y.3d 1047, 995 N.E.2d recorded the 2007 mortgage made pursuant to it in 1153, 2013 N.Y. LEXIS 2130, 973 N.Y.S.2d 81 (2013) violation of § 22. The 2008 amendment to the 2007 loan agreement was also never filed, which also violated § 22. PRIOR HISTORY: Altshuler Shaham Provident Funds, Even if the 2007 loan agreement, as modified by the 2008 Ltd. v. Gml Tower LLC, 83 A.D.3d 1563, 921 N.Y.S.2d amendment, was no longer a building loan contract, the 601, 2011 N.Y. App. Div. LEXIS 3359 (N.Y. App. Div. successor was not relieved of the obligation to file the 4th Dep't, 2011) 2008 amendment. The successor's lien was subordinated to the mechanic's liens under § 22. The successor was DISPOSITION: Judgment appealed from and order of entitled to priority, however, with respect to the $ 5.5 the Appellate Division brought up for review modified, million loan proceeds used to refinance the existing without costs, in accordance with the opinion herein and, mortgage as that tranche of the loan proceeds closed as so modified, affirmed. before any monies were advanced for construction, and the 2007 mortgage in this amount was recorded before CASE SUMMARY: the contractors began work. The 2008 mortgage, which the successor foreclosed, extended the reach of the 2007 mortgage. Thus, $ 5.5 million of the loan proceeds, PROCEDURAL POSTURE: Respondent mechanic's secured by the 2007 and 2008 mortgages, was not subject lienors were granted a summary judgment in a Page 2 21 N.Y.3d 352, *; 995 N.E.2d 110, **; 972 N.Y.S.2d 148, ***; 2013 N.Y. LEXIS 1466 to the subordination penalty. contractors on construction projects to learn exactly what sum the loan in fact made available to the owner of the OUTCOME: The judgment and the order of the real estate for the project. Section 22 subjects a lender's appellate division were modified to provide that the interest to the subordination penalty when the lender successor had a first priority lien with respect to the loan knowingly files a materially false borrower's statement. proceeds used to refinance the existing mortgage. As so modified, the judgment was affirmed. Real Property Law > Construction Law > Contracts CORE TERMS: tower, building loan mortgage, lender, Real Property Law > Financing > Mortgages & Other mortgage, loan agreement, subordination, modification, Security Instruments > General Overview acquisition, recorded, mechanic's liens, foreclosure, real Real Property Law > Nonmortgage Liens > Lien property, loan proceeds, contractor, recording, Priorities mechanic's, building loan, lienor, borrower, hotel, Real Property Law > Nonmortgage Liens > Mechanics' material suppliers, modified, sale of land, county clerk's Liens office, expended, trust account, subordinate, unfiled, Real Property Law > Priorities & Recording > laborers, loaned Recording Acts [HN2] See Lien Law § 22. LexisNexis(R) Headnotes Real Property Law > Construction Law > Contracts Real Property Law > Financing > Mortgages & Other Security Instruments > General Overview Real Property Law > Construction Law > Contracts [HN3] See Lien Law § 2(13). Real Property Law > Financing > Mortgages & Other Security Instruments > General Overview Real Property Law > Construction Law > Contracts Real Property Law > Nonmortgage Liens > Lien Real Property Law > Financing > Mortgages & Other Priorities Security Instruments > General Overview Real Property Law > Nonmortgage Liens > Mechanics' [HN4] A building loan mortgage is a mortgage made Liens pursuant to a building loan contract including an Real Property Law > Priorities & Recording > agreement wherein and whereby a building loan Recording Acts mortgage is consolidated with existing mortgages so as to [HN1] Lien Law § 22 requires that a building loan constitute one lien upon the mortgaged property. Lien contract, with or without the sale of land and before or Law § 2(14). simultaneously with the recording of a building loan mortgage made pursuant to it, must be filed in the clerk's office of the county where land subject to the contract is Real Property Law > Construction Law > Contracts located, along with a borrower's affidavit stating the Real Property Law > Financing > Mortgages & Other consideration paid or to be paid for the loan, any Security Instruments > General Overview expenses incurred or to be incurred in connection with [HN5] Lien Law § 2(4) defines improvement to include the loan, and the net sum available for the construction the demolition, erection, alteration or repair of any project. Section 22 also mandates the filing of any structure upon, connected with, or beneath the surface of, subsequent modifications of a building loan contract any real property and any work done upon such property within 10 days after their execution. Failure to comply or materials furnished for its permanent improvement. § with these filing requirements changes the ordinary 2(4). priority of liens, with a properly filed mechanic's lien taking priority over the interests of the parties to the contract. Thus, a construction lender must file the Real Property Law > Construction Law > Contracts building loan contract in order to achieve lien priority, or, Real Property Law > Financing > Mortgages & Other put the opposite way, the statute imposes a so-called Security Instruments > General Overview "subordination penalty" on a lender who does not do this. Real Property Law > Nonmortgage Liens > Lien The New York legislature has enacted § 22 to permit Priorities Page 3 21 N.Y.3d 352, *; 995 N.E.2d 110, **; 972 N.Y.S.2d 148, ***; 2013 N.Y. LEXIS 1466

Real Property Law > Nonmortgage Liens > Mechanics' subordination penalty of Lien Law § 22. Liens Real Property Law > Priorities & Recording > Recording Acts Real Property Law > Construction Law > Contracts [HN6] Lien Law § 22 does not state that modifications to Real Property Law > Financing > Mortgages & Other a building loan contract must be filed only so long as the Security Instruments > General Overview contract, as modified, remains a building loan contract Real Property Law > Nonmortgage Liens > Lien within the meaning of the Lien Law. Priorities Real Property Law > Nonmortgage Liens > Mechanics' Liens Real Property Law > Construction Law > Contracts Real Property Law > Priorities & Recording > Real Property Law > Financing > Mortgages & Other Recording Acts Security Instruments > General Overview [HN9] Lien Law § 22 does not state that the entire Real Property Law > Nonmortgage Liens > Lien interest of each party to an unfiled building loan contract Priorities is subject to a later-filed notice of lien, and the appellate Real Property Law > Nonmortgage Liens > Mechanics' court does not infer such a limitation from the phrase Liens either with or without the sale of land. The subordination Real Property Law > Priorities & Recording > penalty logically applies only to funds loaned to pay for Recording Acts improvements. [HN7] Although Lien Law § 22 states that any subsequent modification to a building loan contract must COUNSEL: Bruce H. Lederman, for appellant. be filed, this language, which also appears in § 22's predecessor statute, former Mechanics' Lien Law § 21, Timothy M. Bittel, for respondent Hayner Hoyt has always been interpreted to mean any material Corporation. subsequent modification. The New York Supreme Court, Thomas P. Givas, for respondent L.A. Painting, Inc. Appellate Divisions have set out a test for determining when a modification qualifies as material. A modification Jordan R. Pavlus, for respondents TAG Mechanical of a building loan contract is material if it: (1) alters the Systems, Inc. et al. rights and liabilities otherwise existing between the parties to the agreement or (2) enlarges, restricts or Submitted by Mark J. Moretti, for respondent Pike impairs the rights of any third-party beneficiary. In the Company. absence of precedent from the appellate court, the federal courts have applied the HNC Realty test. An unfiled Submitted by Stewart L. Weisman, for respondent modification is material where it restricts of impairs the Pyramid Roofing & Sheet Metal Co., Inc. rights of a third-party beneficiary. An unfiled modification is not a material modification within the JUDGES: Opinion by Judge Read. Chief Judge Lippman meaning of § 22 where the rights of the mechanics' and Judges Smith, Pigott and Rivera concur. Judge lienors, even if they would be third-party beneficiaries, Graffeo dissents in part in an opinion. Judge have not been restricted or impaired and they retain all of Abdus-Salaam took no part. GRAFFEO, J.: (concurring the rights that exist under the filed building loan in part, dissenting in part). agreements. OPINION BY: READ

Real Property Law > Construction Law > Contracts OPINION Real Property Law > Financing > Mortgages & Other Security Instruments > General Overview [*357] [***149] [**111] READ, J.: [HN8] By definition, a building loan contract and building loan mortgage only operate with respect to This mortgage foreclosure action arises from a failed money lent for improvements on real property. Therefore, redevelopment of the Hotel Syracuse complex in the proceeds from the loan which are lent for the downtown Syracuse, New York. The complex consists of purchase of the property are not subject to the several properties interconnected by pedestrian bridges: Page 4 21 N.Y.3d 352, *357; 995 N.E.2d 110, **111; 972 N.Y.S.2d 148, ***149; 2013 N.Y. LEXIS 1466 the hotel, built in 1924 and closed in 2004, and its dollar acquisition financing (the $5.5 million tranche); separate garage (the hotel property); a 15-story tower and for deposit into another dedicated bank account (the constructed in the early 1980's as an addition to the hotel restricted account) to be "held . . . and disbursed, used (the tower building); and a building formerly housing a and applied solely to finance" improvements of the tower major department store, vacant since the early 1990's (the building, based upon construction progress as determined Addis building). The lender for the redevelopment and by an inspector appointed by Altshuler (the $4.5 million numerous mechanic's lienors dispute the priority of their tranche). The 2007 loan agreement seems to have respective claims to the foreclosure sale proceeds from contemplated redevelopment of the tower building into the auction of the tower building, a matter governed by residential condominiums and commercial space.1 Lien Law § 22. 1 The plans for renovation, improvements and I. marketing of the tower building, Exhibit B to the agreement, are not included in the record. In September 2005, defendant GML Tower LLC (GML Tower) purchased the tower building for $7 When the transaction did not close on April 30, million, and GML Syracuse LLC (GML Syracuse) and 2007, Altshuler entered into a "Memorandum of GML Addis LLC (GML Addis) bought the other two Understanding" (the MOU) with GML Tower and parcels making up the hotel complex for an additional Ameris "[i]n connection with" the agreement. The MOU, $2.75 million. The predecessor of a now-defunct dated May 1, 2007, set closing dates for the $5.5 million Illinois-based bank loaned the GML entities $7 million and $4.5 million tranches of May 1 and May 15, 2007, for acquisition of these properties, as evidenced by a respectively. The first of the two tranches timely closed, promissory note and secured by the purchase-money resulting in transfer of $5.5 million from the trust account mortgage in that amount, both dated September 7, 2005. to the Illinois-based bank on May 2, 2007. By an The mortgage, recorded in the Onondaga County Clerk's "Assignment of Note and Mortgage," executed April 19, office on September 8, 2005, encumbered all three 2007, the bank assigned the September 7, 2005 parcels. promissory note and mortgage to Altshuler. Altshuler recorded this instrument in the Onondaga County Clerk's On March 29, 2007, Perfect Provident Fund Ltd., the office on May 3, 2007, along with a "Mortgage Extension predecessor of plaintiff Altshuler Shaham Provident and Modification Agreement," dated April 30, 2007, Funds, Ltd. [***150] [**112] (collectively, Altshuler) which established $5.5 million as the maximum principal entered into a "Loan Agreement" (the 2007 loan indebtedness secured by the mortgage covering the hotel agreement or the agreement) with GML Tower and its complex (the 2007 mortgage). parent company, Ameris Holdings, Inc. (Ameris), whereby Altshuler agreed to loan them $10 million, The parties failed to close on the $4.5 million tranche bifurcated into tranches of $5.5 and $4.5 million. The in accordance with the MOU. Instead, on six separate entire principal amount of the loan was due and payable, occasions from May 24, 2007 though February 21, 2008, with accrued interest at 12% per annum, on March 29, the trustee released monies totaling $2.5 million from the 2010. To secure payment of the amounts owing to trust account to GML Tower, pursuant to the parties' joint Altshuler under the agreement, GML Tower and Ameris instructions and advance letters. These disbursements undertook to grant Altshuler a "first ranking senior [l]ien, were personally guaranteed by Ameris's principal. mortgage, pledge, charge and security interest" (which the agreement referred to collectively as the security Then on March 4, 2008, GML Tower and Ameris interest) in, among other collateral, the property and entered into "Amendment No. 1" (the 2008 amendment improvements made thereon. or the amendment) of the 2007 loan agreement with Altshuler. The 2008 amendment changed the The loan proceeds were to be deposited in a trust improvements to be built and the terms and conditions of account as of the date of the agreement's execution and the release to GML Tower and Ameris of the remaining delivery (i.e., March [*358] 29, 2007), and released by funds held in the trust account (defined as the [*359] the trustee on the closing date, April 30, 2007, "for remaining loan proceeds in the principal sum of $2 immediate repayment" to the Illinois-based bank of the million plus accrued interest and less certain outstanding outstanding principal amount of the original $7 million fees and expenses); [***151] [**113] and provided for Page 5 21 N.Y.3d 352, *359; 995 N.E.2d 110, **113; 972 N.Y.S.2d 148, ***151; 2013 N.Y. LEXIS 1466 the delivery of additional collateral to Altshuler as that GML Tower and GML Addis were in default under security for the $10 million loan2. To these ends, the the terms of the 2008 mortgage and the 2008 assignment 2008 amendment called for construction of residential because mechanic's liens totaling more than $3.755 and commercial rental units in the tower building rather million had been filed against the tower building, and than condominiums; added the Addis building as because they failed to pay real property taxes on the collateral; and eliminated the restricted account, tower and Addis buildings. providing instead for the trustee to release the remaining funds to GML Tower on March 6, 2008, the new closing 3 These GML entities and Ameris eventually date, as an unrestricted lump sum. With the disbursement defaulted in this litigation, as did another of these funds, the existing promissory note was canceled defendant, Ameris's principal, who had given his and replaced and restated by a replacement note (the personal guaranty for $250,000 when Altshuler 2008 note), the guaranties covering the $2.5 million were transferred the loan proceeds remaining in the rescinded, and Ameris's principal gave a new personal trust account (roughly $2 million) to GML Tower guaranty in the principal sum of $250,000. Additionally, and Ameris on March 6, 2008 pursuant to the the lien of the mortgage was apparently released with 2008 amendment. respect to the hotel property owned by GML Syracuse. Altshuler sought foreclosure of both buildings and 2 The 2008 amendment, a 41-page document recoupment of the full amount of its $10 million loan, plus annexes and exhibits, refers to the 2007 loan together with interest and late charges, and first priority agreement as the "Original Loan Agreement," as to the proceeds of the foreclosure sales of the two "supplemented and modified" by the MOU. properties. The mechanic's lienors, for their part, moved or cross-moved for summary judgment, seeking an order Concomitantly, GML Tower and GML Addis that their liens were superior to the 2008 mortgage that entered into a "Mortgage Increase, Modification, and Altshuler sought to foreclose. The mechanic's lienors also Spreader Agreement" (the 2008 mortgage) with Altshuler [***152] [**114] contested the priority of liens as on March 4, 2008. The 2008 mortgage extended the reach amongst themselves. of the 2007 mortgage to cover the Addis building in addition to the tower building, and increased the principal In a decision dated May 17, 2010, Supreme Court amount secured from $5.5 to $10 million. The 2008 observed that the parties acknowledged that Lien Law § mortgage was recorded in the Onondaga County Clerk's 22 subordinates a building loan mortgage made pursuant office on March 7, 2008. To provide Altshuler with to an unfiled building loan contract to subsequently filed additional collateral, GML Tower and GML Addis also mechanic's liens, but disputed whether the 2007 loan executed an "Assignment of Leases and Rents" with agreement was a building loan contract (see 28 Misc 3d respect to the tower and Addis buildings, dated March 4, 475, 478, 900 N.Y.S.2d 846 [Sup Ct Onondaga County 2008 and recorded in the Onondaga County Clerk's office 2010]). The judge ultimately concluded that it was: the on March 7, 2008 (the 2008 assignment). loan agreement was made between a lender and an owner of real property; GML Tower and Ameris made an On December 4, 2008, Altshuler commenced this express promise to construct improvements to the foreclosure action against Ameris, GML Tower and GML property; Altshuler agreed to make periodic advances of Addis,3 and other defendants, including The Hayner Hoyt $4.5 million to fund these improvements; Altshuler was Corporation (Hayner), Syracuse Merit Electric (Merit) to be informed of construction progress; and the $10 and the Pike Company, Inc. (Pike) (collectively, the million loan was to be secured by a mortgage on real mechanic's lienors). Hayner, Merit and [*360] Pike property, and "even label[ed] itself a 'construction loan began work on the tower building on July 16, 2007, transaction[]'" (id. at 479-480). January 20, 2008 and September 4, 2007, respectively; and filed notices of mechanic's liens on October 31, 2008, The judge additionally rejected Altshuler's December 3, 2008, and September 18, 2009, respectively. alternative argument that it was at least entitled to Altshuler alleged that GML Tower and Ameris were in priority with respect to the $5.5 million used to refinance default under the terms of the 2007 loan agreement, as the tower building's acquisition. She concluded that the modified by the 2008 amendment, and the 2008 note, and entire $10 million mortgage was subordinate to the subsequently filed mechanic's liens, relying on Atlantic Page 6 21 N.Y.3d 352, *360; 995 N.E.2d 110, **114; 972 N.Y.S.2d 148, ***152; 2013 N.Y. LEXIS 1466

Bank of New York v Forrest House Holding Co. (234 the priority [***153] [**115] and amounts of the AD2d 491, 492, 651 N.Y.S.2d 607 [2d Dept 1996]), and mechanic's liens; ordered sale of the tower and Addis declining to follow Yankee Bank [*361] for Finance & buildings;5 and directed the referee to file his report Savings, FSB v Task Associates, Inc. (731 F Supp 64, 71 afterwards. The order also stayed the foreclosure sale of n 2 [ND NY 1990]). the tower building pending disposition of Altshuler's appeal. Since Altshuler contested only the priority of Accordingly, Supreme Court granted Hayner's rights to the proceeds from the sale, however, we [*362] motion and Merit's and Pike's cross motions to the extent declined to apply the exception to the finality rule for they argued their mechanic's liens were superior to irreparable injury, and dismissed Altshuler's appeal on Altshuler's mortgage. The judge further agreed with February 9, 2012 (18 NY3d 892, 963 N.E.2d 778, 940 Merit that its lien was superior to Hayner's under Lien N.Y.S.2d 202 [2012]); on May 3, 2012, we denied Law § 56 "because it was a subcontractor to [Hayner] as reargument (19 NY3d 837, 969 N.E.2d 209, 946 general contractor" (id. at 482); and turned down Pike's N.Y.S.2d 93 [2012]). In the meantime, Supreme Court, argument that "its lien [was] superior to all others by order signed March 29, 2012, vacated the stay of pursuant to section 13 [of the Lien Law] because it enforcement. performed labor" (id.). Altshuler appealed Supreme Court's ensuing order, entered May 20, 2010. 5 There were no mechanic's liens filed against the Addis building, which sold at public auction On April 29, 2011, the Appellate Division affirmed on August 7, 2012 for $200,000. Altshuler was "for reasons stated in the decision at Supreme Court" (83 paid $198,750, the sale proceeds less the referee's AD3d 1563, 1563, 921 N.Y.S.2d 601 [4th Dept 2011]). fee. The Court did not address Altshuler's argument that the 2007 loan agreement was merely "a preliminary The tower building was sold at public auction on agreement that expired before the mortgage at issue was June 6, 2012 for $1,396,633.82, and Supreme Court filed" because this contention was "raised for the first confirmed the referee's report on July 12, 2012. Hayner time on appeal and could have been obviated or cured by was the purchaser6. Altshuler then again sought leave to factual showings or legal countersteps in Supreme Court" appeal, which we granted on October 23, 2012 (19 NY3d (id. [internal quotation marks omitted])4. On July 1, 814, 979 N.E.2d 813, 955 N.Y.S.2d 552 [2012]). 2011, the same panel denied Altshuler's motion for leave to appeal to us (86 AD3d 934, 926 N.Y.S.2d 838 [4th 6 The tower building's sale price was just Dept 2011]). sufficient to pay Pike, to pay Hayner's subcontractors, to reimburse Altshuler for 4 Although not pursuing the option in this case, expenses incurred during the pendency of the the Appellate Division may, in the exercise of its foreclosure, and to pay the referee's expenses, "interests of justice" jurisdiction, always reach an with $1,711.89 left over to refund to Haynor. issue not preserved at Supreme Court (see Martin v City of Cohoes, 37 NY2d 162, 165, 332 N.E.2d II. 867, 371 N.Y.S.2d 687 [1975]). The Court of Appeals, by contrast, generally lacks power to [HN1] Section 22 of the Lien Law requires that a review unpreserved issues even where the building loan contract, with or without the sale of land Appellate Division has chosen to do so (see and before or simultaneously with the recording of a Brown v City of New York, 60 NY2d 893, 894, building loan mortgage made pursuant to it, must be filed 458 N.E.2d 1248, 470 N.Y.S.2d 571 [1983]; see in the clerk's office of the county where land subject to also Hecker v State, 20 NY3d 1087, 1087, 987 the contract is located, along with a borrower's affidavit N.E.2d 636, 965 N.Y.S.2d 75 [2013]). stating the consideration paid or to be paid for the loan, any expenses incurred or to be incurred in connection On October 26, 2011, Supreme Court issued an with the loan, and the net sum available for the agreed-upon "Final Order for Judgment of Foreclosure construction project. Section 22 also mandates the filing and Sale," which awarded Altshuler a judgment of $10 of any subsequent modifications of a building loan million; dismissed Altshuler's causes of action seeking a contract within 10 days after their execution. Failure to declaration that its mortgage enjoyed first priority; set out comply with these filing requirements changes the Page 7 21 N.Y.3d 352, *362; 995 N.E.2d 110, **115; 972 N.Y.S.2d 148, ***153; 2013 N.Y. LEXIS 1466 ordinary priority of liens, with a properly filed mechanic's moneys to be loaned or represent moneys lien taking priority over the interests of the parties to the to be paid" (Lien Law § 2 [13]). contract7. Thus, a construction lender must [*363] file the building loan contract in order to achieve lien priority, And [HN4] a "building loan mortgage" is "a mortgage or, put the opposite way, the statute imposes a so-called made pursuant to a building loan contract . . . , "subordination penalty" on a lender who does not do this. includ[ing] an agreement wherein and whereby a building We have said that the Legislature enacted section 22 to loan mortgage is consolidated with existing mortgages so permit contractors on construction projects "to learn as to constitute one lien upon the mortgaged property" exactly what sum the loan in fact made available to the (Lien Law § 2 [14]). owner of the real estate for the project" (Nanuet Natl. [***154] [**116] Bank v Eckerson Terrace, 47 NY2d 8 [HN5] Section 2 (4) of the Lien Law defines 243, 247, 391 N.E.2d 983, 417 N.Y.S.2d 901 [1979] "improvement" to include, among other things, [holding that section 22 subjects a lender's interest to the "the demolition, erection, alteration or repair of subordination penalty when the lender knowingly files a any structure upon, connected with, or beneath the materially false borrower's statement]). surface of, any real property and any work done upon such property or materials furnished for its 7 Section 22, in relevant part, states as follows: permanent improvement" (Lien Law § 2 [4]). [HN2] "A building loan contract either with or without the sale of land, and any modification The 2007 loan agreement is a building loan contract thereof, must be in writing and duly as defined under section 2 (3) of the Lien Law: the acknowledged, and must contain a true statement agreement called for transfer of $4.5 of the $10 million under oath, verified by the borrower, showing the deposited by Altshuler into the trust account to a consideration paid, or to be paid, for the loan dedicated bank account of GML Tower/Ameris (the described therein, and showing all other expenses, restricted account), to be "released if, when and as if any, incurred, or to be incurred in connection required to finance and pay [for] the construction of" the therewith, and the net sum available to the improvements to the tower building, "subject to the terms borrower for the improvement, and, on or before and conditions of" the construction plans, and these loan the date of recording the building loan mortgage proceeds were to be secured by a mortgage. Because the made pursuant thereto, to be filed in the office of 2007 loan agreement was a building loan contract, Lien the clerk of the county in which any part of the Law § 22 obligated Altshuler to file the agreement in the land is situated, except that any subsequent Onondaga County [*364] Clerk's office prior to the modification of any such building loan contract so recording of any mortgage made pursuant thereto, or filed must be filed within ten days after the suffer loss of lien priority. Altshuler never filed the 2007 execution of any such modification. . . . If not so loan agreement; it recorded the 2007 mortgage on May 3, filed the interest of each party to such contract in 2007. the real property affected thereby, is subject to the lien and claim of a person who shall thereafter Altshuler counters that the 2007 mortgage was not file a notice of lien under [the Lien Law]" (Lien recorded "pursuant []to" the 2007 loan agreement as Law § 22 [emphasis added]). required by Lien Law § 22; however, the recorded mortgage states that it is "to secure . . . payment and/or Section 2 (13) of the Lien Law, defines a [HN3] performance of all indebtedness and obligations of [GML "building loan contract" as Tower] and/or Ameris described in the [2007 loan agreement]." Additionally, the 2007 loan agreement "a contract whereby a . . . 'lender,' in directed that Altshuler's security interest in the property consideration of the express promise of an be "perfected and duly recorded" in Onondaga County, owner to make an improvement8 upon real and the agreement defined a security interest to include a property, agrees to make advances to or mortgage. In short, the 2007 mortgage was made for the account of such owner to be pursuant to the unfiled agreement. secured by a mortgage on such real property, whether such advances represent Next, the 2008 amendment is explicitly labeled an "amendment" to the 2007 loan agreement, designed to Page 8 21 N.Y.3d 352, *364; 995 N.E.2d 110, **116; 972 N.Y.S.2d 148, ***154; 2013 N.Y. LEXIS 1466

"amend the terms and conditions for release of the a modification qualifies as material (see HNC [r]emaining [f]unds" to GML Tower and Ameris, and to Realty Co. v Bay View Towers Apts., 64 AD2d "revise" the improvement plans in the agreement to fit the 417, 426, 409 N.Y.S.2d 774 [2d Dept 1978] ["a new plan to construct rental apartments rather than modification of a building loan contract is condominiums. In fact, the 2008 amendment is not a 'material' if it (1) alters the rights and liabilities stand-alone document; it is essentially a compilation of otherwise existing between the parties to the edits of various provisions in the 2007 loan agreement, agreement or (2) enlarges, restricts or impairs the and must be read together with that earlier document in rights of any third-party beneficiary"]; Howard order to be intelligible. Altshuler never filed the 2008 Sav. Bank v. Lefcon Partnership, 209 AD2d 473, amendment. This was another violation of section 22, 475, 618 N.Y.S.2d 910 [2d Dept 1994] [same]). which specifies that modifications of building loan In the absence of precedent from our court, the contracts must be filed. federal courts have applied the HNC Realty test (see Yankee Bank, 731 F Supp at 70 [holding that Altshuler contends, though, that assuming the 2007 unfiled modification was material because it loan agreement is a building loan contract (and we have restricted or impaired the rights of a third-party now held [***155] [**117] that it is), the 2008 beneficiary]; In re Lynch III Props. Corp., 125 amendment converted the agreement into a standard loan BR 857, 861 [Bankr ED NY 1991] [holding that contract, and the 2008 mortgage was recorded pursuant to the unfiled modification was "not a material the amendment, not the agreement. But even if Altshuler modification . . . within the meaning of section 22 is correct that the 2007 loan agreement, as modified by of the New York Lien Law" because "[t]he rights the 2008 amendment, was no longer a building loan of the mechanics' lienors, even if they would be contract as defined by Lien Law § 2 (13) -- a question we third-party beneficiaries, have not been restricted need not and do not decide -- it does not follow that or impaired and they retain all of the rights that Altshuler was relieved of the obligation to file the exist under the filed Building Loan Agreements"]; amendment. [HN6] Lien Law § 22 does not state that but see In re Admiral's Walk, Inc., 134 BR 105, modifications to a building loan contract must be filed 121 [Bankr WD NY 1991] [criticizing HNC only so long as the contract, as modified, remains a Realty, and suggesting that the underlying facts in building loan contract within the meaning of the Lien cases considering the materiality of a modification Law. This makes sense, given that the reason for public have never shown that "alteration of rights as filing is to allow any interested contractors, between the lender and borrower is . . . alone subcontractors and material suppliers to discover the sufficient to warrant subordination -- there must level of financing available for construction so that they also be some element of impairment of rights of [*365] might guide their actions accordingly (see section 22 beneficiaries in order that a Nanuet, 47 NY2d at 247). Further, if the 2007 loan modification be so 'material' or 'essential' as to agreement had been filed, as it should have been, warrant its filing, on penalty of subordination"]). Altshuler's failure to file the 2008 amendment clearly We do not need to address the proper test for would have violated the statute9. Altshuler should not materiality on this appeal. By arguing that the benefit from an earlier violation of the law. 2008 amendment transformed the fundamental character of the 2007 loan agreement, Altshuler 9 [HN7] Although section 22 states that "any effectively concedes that the amendment worked subsequent modification" (emphasis added) to a a material modification under any conceivable building loan contract must be filed, this test. language, which also appeared in section 22's predecessor statute, former Mechanics' Lien Law III. § 21, has always been interpreted to mean any "material" subsequent modification (see Finally, we consider whether Altshuler is entitled to Pennsylvania Steel Co. v Title Guar. & Trust Co., priority with respect to the $5.5 million of the loan 193 NY 37, 42, 85 N.E. 820 [1908], rearg denied proceeds used to refinance the existing mortgage, which 193 NY 682, 87 N.E. 1124 [1908]). The Appellate covered the tower building, the Addis building, and the Divisions have set out a test for determining when hotel property. Before this litigation, the Atlantic Bank Page 9 21 N.Y.3d 352, *365; 995 N.E.2d 110, **117; 972 N.Y.S.2d 148, ***155; 2013 N.Y. LEXIS 1466 and Yankee Bank courts considered whether a and the parties do not seem to have disputed that money subordination penalty applies to funds loaned in a loaned for this purpose was not subject to the building loan contract for financing the purchase of the subordination penalty. In this regard, the Judge observed property on which the improvements are to be made. that They reached opposite conclusions. [HN8] "[b]y definition a 'building loan [*366] [***156] [**118] In Atlantic Bank, a contract' and 'building loan mortgage' only foreclosure action, the plaintiff bank sought summary operate with respect to money lent for judgment against the mechanic's lienor defendants on the improvements on real property. [*367] ground that its recorded mortgage had priority, at least to Therefore, the proceeds from the loan the extent of the $2.2 million loan given by it to the which were lent for the purchase of the borrower for land acquisition. Applying a liberal property are not subject to the interpretation, the Appellate Division took inclusion of subordination penalty of Lien Law § 22" the phrase "either with or without the sale of land" in (731 F Supp at 71, n 2] [internal citation section 22 to "impl[y] that if a lender fails to comply with omitted]). the requirements of the Lien Law, its entire mortgage, including that part securing loan proceeds advanced for In fact, though, the amount of the loan proceeds the purchase of the property, would become subordinate expended to buy the building was only approximately to any subsequently filed mechanic's liens" (234 AD2d at $250,000. As a result, the dispute between the FDIC and 492 [emphasis added]). the mechanic's lienor defendants centered on whether the FDIC had a first priority lien in the foreclosure sale Yankee Bank was a foreclosure action that was proceeds for $610,000, or the lesser amount actually removed to federal court when the Federal Home Loan expended toward purchase of the building. The Judge Bank Board found the plaintiff bank to be insolvent and ruled that the FDIC would enjoy first priority in an appointed the Federal Deposit Insurance Corporation amount equivalent to what was actually spent (to be (FDIC) as receiver. The FDIC was consequently determined by the magistrate)10 rather than [***157] effectively substituted for the bank as plaintiff. The [**119] the full $610,000 in the first advance, and the subject of the litigation was another building in Syracuse, mechanic's lienor defendants would be paid any New York, and the issue before the District Court Judge foreclosure sale proceeds beyond this amount. was the priority of rights to the foreclosure sale proceeds as between the FDIC and the mechanic's lienor 10 The dissent opines that the subordination defendants. penalty will "likely . . . prove difficult to enforce" if loan proceeds for property acquisition are The Judge first decided that New York law supplied excluded from its scope, commenting that "it may the rule of decision. In this particular case, the building be difficult to discern precisely what proportion of loan contract between the bank and the developers a loan was earmarked for acquisition expenses allowed the bank to advance up to $610,000 for the and what portion was actually expended for that acquisition of the building, and provided that no purpose," pointing to the referral to the magistrate additional funds would be released until the developers in Yankee Bank as an example (dissenting op at obtained a surety payment bond. The bank, however, 7-8). First, there does not seem to have been much advanced funds beyond $610,000 without the required dispute in Yankee Bank over how much of the bond being in place. The mechanic's lienor defendants loan was actually applied to the building's argued that this was an unfiled modification of the purchase price (there was a deed filed in the contract in violation of Lien Law § 22. The Judge agreed, county clerk's office, after all). Rather, the record and so held that the bank's mortgage would be was apparently incomplete on this score because subordinated to the defendants' interests. He then turned the magistrate had concluded that the rights of the his attention to the question of the degree of mechanic's lienor defendants were to be subordination. determined with reference to the amount The building loan contract apparently earmarked this committed by the loan agreement toward first advance of $610,000 for acquisition of the building, acquisition rather than the amount actually spent Page 10 21 N.Y.3d 352, *367; 995 N.E.2d 110, **119; 972 N.Y.S.2d 148, ***157; 2013 N.Y. LEXIS 1466

for that purpose. In this case there is no difference I join that part of the majority opinion determining between the amount of the loan "earmarked" and that the 2007 Loan Agreement was a building loan "actually expended" to refinance the loan made to contract within the meaning of Lien Law § 22. However, acquire the three properties making up the hotel because I read the plain language of the subordination complex -- i.e., $5.5 million. This is probably by penalty in this statute to apply to the lender's "interest . . . far the more common situation. In any event, in the real property" -- the total mortgage and not just the given that the amount "earmarked" and the portion attributable to construction funds -- I respectfully amount "actually expended" are identical in this dissent from the majority's conclusion that $5.5 Million case, we need not resolve and express no opinion of the loan proceeds were not subject to the subordination as to which would be properly excluded from the penalty. scope of the subordination penalty in a case, like Yankee Bank, where there is a difference. As the majority explains, Lien Law § 22 establishes a recording requirement relating to a "building loan This result is consistent with the language of Lien contract" as follows: Law §§ 22 and 2 (3), (13) and (14), and does not contravene the statute's purpose, to give contractors and "A building loan contract either with or material suppliers notice of how much money a building without the sale of land, and any loan makes available for construction. [HN9] Section 22 modification thereof, must be in writing does not state that the entire interest of each party to an and duly acknowledged, and must contain unfiled building loan contract is subject to a later-filed a true statement under oath, verified by the notice of lien, and we do not infer such a limitation from borrower, showing the consideration paid, the phrase "either with or without the sale of land," as did or to be paid, for the loan described the Atlantic Bank court. As the Yankee Bank court therein, and showing all other expenses, if pointed out, the subordination penalty logically applies any incurred, or to be incurred in only to funds loaned to pay for improvements. Here, the connection therewith, and the net sum 2007 loan agreement [*368] allocated $5.5 million of available to the borrower for the the loan proceeds to pay off the existing purchase- money improvement, and, on or before the mortgage. This tranche closed before any monies were [***158] [**120] date of recording the advanced for construction, and the 2007 mortgage in this building loan mortgage made pursuant amount was recorded before any contractor began work thereto, to be filed in the office of the clerk on the project. The 2008 mortgage, which Altshuler of the county in which any part of the land foreclosed in this litigation, simply extended the reach of is situated, except that any subsequent and increased the principal amount secured by the 2007 modification of any such building loan mortgage. We therefore conclude that $5.5 million of the contract so filed must be filed within ten loan proceeds, secured by the 2007 and 2008 mortgages, days after the execution of any such was not subject to the subordination penalty. modification" (emphasis added).

Accordingly, the judgment appealed from and the [*369] As a consequence of the failure to comply with order of the Appellate Division brought up for review the recording requirement, Lien Law § 22 imposes what should be modified, without costs, in accordance with has come to be known as the subordination penalty, this opinion and, as so modified, affirmed. providing that if the building loan contract is "not so filed the interest of each party to such contract in the real CONCUR BY: GRAFFEO (In Part) property affected thereby is subject to the lien and claim of a person who shall thereafter file a notice of lien under DISSENT BY: GRAFFEO (In Part) this chapter." In other words, even though a lender's mortgage might have been recorded first, if it was issued DISSENT pursuant to a building loan contract that was not properly recorded, the lender's mortgage loses its first-in-time GRAFFEO, J.: (concurring in part, dissenting in priority and becomes subordinate to part) subsequently-recorded mechanics' liens. Page 11 21 N.Y.3d 352, *369; 995 N.E.2d 110, **120; 972 N.Y.S.2d 148, ***158; 2013 N.Y. LEXIS 1466

The recording requirement is intended to benefit where acquisition funds and construction monies would contractors, laborers and material suppliers who work on be addressed in [***159] [**121] a single loan secured construction projects. Its purpose is "to readily enable a by a mortgage. Nonetheless the subordination penalty contractor to learn exactly what sum the loan in fact made that appears later in the statute does not include any available to the owner of the real estate for the project" language indicating an intent to exclude that portion of a (Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243, mortgage securing acquisition funds from its scope. 247, 391 N.E.2d 983, 417 N.Y.S.2d 901 [1979] Rather, it provides, in broad terms, that "the interest of [inclusion of false information in building loan contract each party to such contract in the real property affected that was recorded triggered subordination penalty]; see thereby is subject to the lien and claim of a person" who also Howard Sav. Bank v Lefcon Partnership, 209 AD2d later files a mechanic's lien (Lien Law § 22 [emphasis 473, 476, 618 N.Y.S.2d 910 [2d Dept 1994], lv dismissed added]). It is the "interest" of the lender "in the real 86 NY2d 837, 658 N.E.2d 223, 634 N.Y.S.2d 445 property" that is subordinated to later-filed mechanics' [1995]), and to preclude lenders and owners from liens -- and the lender's interest in the real property is entering into "secret agreements" in that regard. reflected in the entire mortgage, not merely a portion of it. As the Appellate Division explained in Atlantic Bank, Plaintiff lender argues -- and the majority accepts -- that Lien Law § 22 does not require that the "if a lender fails to comply with the subordination penalty apply to the entire mortgage but requirements of the Lien Law, its entire covers only the portion relating to the advancement of mortgage, including the part securing loan construction funds. It further asserts that, since the proceeds advanced for the purchase of the purpose of the statute is to protect contractors, laborers property, would become subordinate to and material suppliers, it makes no sense to preclude a any subsequently filed mechanic's liens. lender from claiming priority with respect to the portion This interpretation is consistent with the of the loan that had nothing to do with construction but overriding concern that the lender is the related to the initial acquisition of the property. In my party responsible for compliance and that view, this argument should be rejected because the plain the threat of the loss of priority is an language of the statute directs that the full mortgage effective deterrent against a lender interest -- not just the part securing the funds used for shirking this responsibility . . . To the construction purposes -- is subject to the subordination extent that this outcome may be harsh, it penalty, as two New York courts had held before the must be understood that we are here Appellate Division reached the same conclusion in this dealing not with equitable redress, but case (see Atlantic Bank of N.Y. v Forrest House Holding with a statutorily imposed penalty" Co., 234 AD2d 491, 651 N.Y.S.2d 607 [2d Dept 1996]; (Atlantic Bank, 234 AD2d at 492 [internal HNC Realty Co. v Golan Hgts. Dev., 79 Misc 2d 696, quotation marks and citation omitted]). 360 N.Y.S.2d 954 [Sup Ct 1974]).

Critically, Lien Law § 22 begins by indicating that In arguing to the contrary, the lender relies on the statute applies to "[a] building loan contract either Yankee Bank for Fin. & Sav. FSB v Task Assoc., Inc. (731 with or without the sale of land," thereby contemplating F Supp 64 [ND NY 1990]), a Federal District Court building loan agreements in which money is loaned both decision that was issued before the Appellate Division to purchase the property and [*370] construct decided Atlantic Bank. Although the majority finds this improvements. Thus, just because some of the funds case to be persuasive, I believe that reliance is misplaced. disbursed relate to the acquisition of the real property to First, as the majority acknowledges, in Yankee [*371] be improved (or, in this case, the refinance of a mortgage Bank neither party asserted that funds used for acquisition previously used to acquire the real property to be of the building were subject to the subordination penalty improved), this does not prevent a loan agreement that so the court was not confronted with the precise issue otherwise meets the building loan contract criteria from presented here. Second, without addressing the plain being subject to the recording rule (as the majority also language in the subordination penalty, the District Court concludes). It is therefore clear that the Legislature held in summary fashion that the lender retained its first understood that there would be contracts like the one here priority interest in the foreclosure sale proceeds "only up Page 12 21 N.Y.3d 352, *371; 995 N.E.2d 110, **121; 972 N.Y.S.2d 148, ***159; 2013 N.Y. LEXIS 1466 to that amount actually expended toward the purchase of documents in the County Clerk's Office. One of the the . . . building," with the remainder of its interest purposes behind the recording requirement is to make subordinated to the mechanic's lienors. It is evident from future contractors, laborers and material suppliers aware a footnote that, rather than interpreting the subordination of the funds available for construction so that, prior to penalty itself, the court considered only the definitions of working on a project, they can make knowledgeable "building loan contract" and "building loan mortgage." decisions concerning the amount of labor or materials to Noting (erroneously, in my view) that these definitions expend and the type of payment and security terms to relate only to monies advanced for improvements on demand. When acquisition funds are part of the loan, this property, the court reasoned that "the proceeds from the necessarily diminishes the amount available to fund loan which were lent for the purchase of the property improvements on the real property. But if contractors are were not subject to the subordination penalty" (731 F unaware of the extent to which the loan covers Supp 64 at n 2). But I believe that the Lien Law takes a acquisition costs due to the failure to file a building loan more encompassing view. Section 22 makes clear that the contract, they may expend more labor and materials, and subordination penalty applies to a building loan contract, on different terms, than would have been the case had regardless of whether it involves the sale of land, and they been provided with the accurate information that the then indicates it is the lender's interest in the real statute requires. property that is subordinated. The lender's interest in the property is the total mortgage, not just the portion that Moreover, if documents are not timely filed prior to correlates to the loan of construction funds. I therefore the recording of the mortgage, resulting in the terms of prefer the better-reasoned New York precedent. the loan not being reflected in the public record, courts will be left to reconstruct the loan agreement between the Since the statutory language warrants a finding that lender and the building owner after the fact during a the entire mortgage is subordinated when a building loan foreclosure action or other litigation when there may be contract is not recorded, both Supreme Court and the disputes concerning the scope of the contract and the Appellate Division properly concluded in this case that intent and effect of various written and oral the lender's $10 Million mortgage was subordinate to the modifications. This problem is apparent here where the mechanics' liens. Although this appears to wipe [***160] lender's view concerning the terms of the arrangement -- [**122] out any recovery for the lender, the Legislature whether certain documents were superceded or remained adopted this statutory penalty to dissuade lenders from in effect -- has evolved over the course of litigation and engaging in the very conduct that occurred here: failing where the defaulting borrower did not participate and to comply with the building loan contract recording clarify the record. The bottom line is that, after a deal has requirement. Here, none of the agreements relating to this gone south, it may be difficult to discern precisely what loan were recorded: not the Loan Agreement, the proportion of a loan was earmarked for acquisition Memorandum of Understanding nor Amendment No. 1, expenses and what portion was actually expended for that which was executed contemporaneously with the 2008 purpose (a dispute of that kind apparently arose in Yankee mortgage. And timely filing of documents and Bank) -- and the courts, as well as the contractors, amendments is particularly necessary in cases such as this laborers and material suppliers will be at the mercy of the where aspects of the loan fail to close on time and parties to the loan to resolve the controversy. Timely material terms are amended while the project is ongoing recording of the proper documents when the loan occurs -- facts that can raise red flags to interested contractors, and prior to the filing of the mortgage obviates this laborers and material suppliers if revealed. problem. Of course, the subordination penalty will only come into play when that [*373] has not happened and I [*372] I believe that the rule the majority has fear that the rule the majority adopts today will add to the fashioned is antithetical to the purpose of the penalty and confusion. is likely to prove difficult to enforce. The subordination penalty is triggered when a lender fails to record a For all of these reasons, I conclude that the majority's building loan contract or amendments thereto, or when bifurcation rule unnecessarily complicates the application information in filed agreements proves to be false. The of the subordination penalty which, as constructed by the burden it imposes on lenders is minimal -- the statutory Legislature, should be straightforward and require requirement is met merely by filing the pertinent nothing more than giving the lender's mortgage the Page 13 21 N.Y.3d 352, *373; 995 N.E.2d 110, **122; 972 N.Y.S.2d 148, ***160; 2013 N.Y. LEXIS 1466 priority it would [***161] [**123] have had if it had subject to the subordination penalty. been recorded after the mechanics' liens. The Legislature appears to have made a considered decision that as **** between the lender, who could have protected its investment in full merely by timely recording its Judgment appealed from and order of the Appellate documents, and the contractors, laborers and material Division brought up for review modified, without costs, suppliers, who were inappropriately kept in the dark, it is in accordance with the opinion herein and, as so the lender who should bear the loss. It is not for the modified, affirmed. Opinion by Judge Read. Chief Judge courts to disturb that decision by creating a limitation on Lippman and Judges Smith, Pigott and Rivera concur. the subordination penalty that does not appear anywhere Judge Graffeo dissents in part in an opinion. in the statute. Because the majority does so, I respectfully Judge Abdus-Salaam took no part. dissent from the majority's opinion to the extent that it Decided June 11, 2013 holds that $5.5 Million of the loan proceeds were not Exhibit NN: Lehman Brothers Holdings Inc v. Genwood Strathaller LLC 2011 NY Misc. Lexis 6154 Page 1

1 of 52 DOCUMENTS

LEHMAN BROTHERS HOLDINGS INC., and SASCO 2008-C2, LLC, Plaintiff v. GENWOOD STRATHALLAN LLC; NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE; ATLANTIC GRANITE & MARBLE, INC.,; STICKS AND STONES, INC.; M&T REMODELING SERVICES, INC.; ANDREW J. PRINCIPE d/b/a PRINCIPE AIR COMPONENTS; JOHN DOE AND MARY DOE Such Names Being Fictitious, it Being the Intention of the Plaintiff to Designate Any Occupants of the Mortgaged Premises Who May Have Any Interest in the Same, Defendants.

Index No. 2010/10157

SUPREME COURT OF NEW YORK, MONROE COUNTY

2011 N.Y. Misc. LEXIS 6154

October 11, 2011, Decided October 29, 2011, Filed

NOTICE: NOT APPROVED BY REPORTER OF Lender") and SASCO 2008-C2, LLC ("Sasco") move DECISIONS FOR REPORTING IN STATE REPORTS. pursuant to CPLR 3212 for an order granting summary judgment as follows: an order (1) dismissing the CORE TERMS: repair, mortgage, escrow, borrower's, counterclaim of Defendant M&T Remodeling Services, loan agreement, consolidated, lender, disbursed, deposits, Inc. ("M&T"), (2) severing the cross-claim of M&T; (3) escrow accounts, building loan, summary judgment, directing the entry of judgment in plaintiffs' favor against security agreement, mechanics lien, Lien Law, building defendants for the relief demanded in the verified loan, real property, citations omitted, counterclaim, complaint, including foreclosure of the mortgages and foreclosure, prima facie, issues of fact, express promise, disposition of the collateral that is the subject of the cross-claim, entitlement, collateral, deposited, subpoena, security agreement; (4) severing and striking the action as security interest, hotel to John Doe and Mary; and (5) referring this matter to a duly appointed referee. JUDGES: [*1] KENNETH R. FISHER, JUSTICE SUPREME COURT. In a separate motion, defendant Genwood Strathallen LLC's ("Genwood" or "Borrower") moves for an order OPINION BY: KENNETH R. FISHER pursuant to CPLR 2304 quashing or modifying a subpoena served on it by co-defendant M&T Remodeling OPINION Services, Inc. ("M&T").

The subpoena seeks a deposition and production of DECISION AND ORDER documents in this action generally centered around the loans and mortgages that are the subject of this action and Plaintiffs, Lehman Brothers Holdings Inc. ("LBH or communications between Genwood and plaintiff. Page 2 2011 N.Y. Misc. LEXIS 6154, *1

Genwood argues that [*2] it has not appeared or that, among other things, assigned [*4] to Sasco a answered the present action and there are no claims or participation interest in the Note and Mortgages, giving crossclaims between M&T Remodeling and it and M&T Sasco a beneficial interest in the mortgages while LBH could not possibly need this information to defend at retained legal title as the holder of the Consolidated Note trial. Genwood argues that M&T is using this action to and mortgages. aid in its Florida action against Genwood seeking to collect on monies owed for services that are the subject of To further secure the Consolidated Note, on January the lien which M&T asserts in this action. M&T's 30, 2007, Genwood executed a Security Agreement maintains that the documents and testimony it seeks are ("Security Agreement") granting to LBH a security necessary to establish M&T's defense to the foreclosure interest in any and all items of personal property, action that its lien has priority over plaintiffs'. furniture, fixtures and equipment then owned or thereafter acquired by Genwood, as more specifically set This is an action to foreclose on certain consolidated forth in Ex. B of the Security Agreement ("Collateral"). mortgages and security agreements. On January 23, 2007, On June 1, 2009, LBH perfected its security interest in LaSalle Bank assigned various mortgages, previously the Collateral with a filing of a UCC Financing Statement spread and consolidated, to LBH. On January 30, 2007, with NYS Department of State. TriMont Real Estate defendant Genwood Strathallen LLC ("Genwood" or Advisors, Inc., provides loan servicing services to Sasco "Borrower") executed a Consolidated, Amended and concerning the Consolidated Note and First and Second Restated Mortgage Note ("Consolidated Note") in favor Mortgage. TriMont's Vice President has submitted an of LBH for $14,600,000. Also on January 30, 2007, affidavit averring that the Borrower failed to make certain Genwood executed a Consolidated, Amended and interest payments due and owing on December 1, 2008 Restated Mortgage, Assignment of Leases and Rents and and failed to make the payments each month thereafter. Security Agreement ("First Mortgage") to secure the Due demand was made, but payment was not principal amount of $12,750,000. On the same day, the forthcoming. The loan matured on February 1, 2010. At Borrower and Lender [*3] executed a Loan Agreement. that time, the Borrower similarly failed to make [*5] This agreement required that Borrower place certain of payment in full of the outstanding principal and accrued the funds advanced by the Lender into interest bearing interest due and owing under the Consolidated Note. escrow accounts; $1,750,000, the "PIP Deposit" and Plaintiffs alleges that $14,600,000 remains due as of July $122,750, "Immediate Repair Work Deposit." These 13, 2010, plus interest and late charges. funds were to be disbursed in accordance with the terms of the First Repair Escrow Agreement ("First Repair It is well settled that "the proponent of a summary Agreement"). judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering The Loan Agreement also provided for an sufficient evidence to demonstrate the absence of any "Additional PIP Deposit" of $1,750,000 (held back at the material issues of fact." Alvarez v. Prospect Hosp., 68 time of the January 30, 2007 disbursement) to be N.Y.2d 320, 324, 501 N.E.2d 572, 508 N.Y.S.2d 923 disbursed by the Lender on July 30, 2007 and placed in (1986) (citations omitted). See also, Potter v. Zimber, 309 an escrow account. This $1,750,000 was secured by a A.D.2d 1276, 764 N.Y.S.2d 736 (4th Dept. 2003) Mortgage, Assignment of Leases and Rents and Security (citations omitted). "Once this showing has been made, Agreement in of LBH ("Second Mortgage"). The First the burden shifts to the nonmoving party to produce and Second Mortgages granted to LBH a security interest evidentiary proof in admissible form sufficient to in certain property known as Strathallan Hotel, at 550 establish the existence of material issues of fact that East Avenue, Rochester, New York (the "premises"), require a trial for resolution." Giuffrida v. Citibank Corp., These funds were to be disbursed in accordance with the 100 N.Y.2d 72, 81, 790 N.E.2d 772, 760 N.Y.S.2d 397 Second Repair Escrow Agreement (containing essentially (2003), citing Alvarez, 68 N.Y.2d at 324. "Failure to the same terms as the First Repair Escrow Agreement), make such showing requires denial of the motion, also executed January 30, 2007. regardless of the sufficiency of the responsive papers." Wingrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851, On or about May 22, 2008, LBH and Sasco, and 853, 476 N.E.2d 642, 487 N.Y.S.2d 316 (1985) (citation others, entered into a Master Participation Agreement omitted). See also, Hull v. City of North Tonawanda, 6 Page 3 2011 N.Y. Misc. LEXIS 6154, *5

A.D.3d 1142, 1142-43, 775 N.Y.S.2d 656 (4th Dept. A building loan contract is defined under the Lien 2004). [*6] When deciding a summary judgment motion, Law at §2(13). the evidence must be viewed in the light most favorable to the nonmoving party. See Russo v. YMCA of Greater Buffalo, 12 A.D.3d 1089, 784 N.Y.S.2d 782 (4th Dept. 2004). The court's duty is to determine whether an issue The term "building loan contract," when of fact exists, not to resolve it. See Barr v. County of used in this chapter, [*8] means a contract Albany, 50 N.Y.2d 247, 406 N.E.2d 481, 428 N.Y.S.2d whereby a party thereto, in this chapter 665 (1980); Daliendo v Johnson, 147 A.D.2d 312, 317, termed "lender," in consideration of the 543 N.Y.S.2d 987 (2nd Dept. 1989) (citations omitted). express promise of an owner to make an improvement upon real property, agrees to "In order to establish prima facie entitlement to make advances to or for the account of summary judgment in a foreclosure action, a plaintiff such owner to be secured by a mortgage must submit the mortgage and unpaid note, along with on such real property, whether such evidence of default." Capstone Bus. Credit, LLC v. advances represent moneys to be loaned or Imperia Family Realty, LLC, 70 A.D.3d 882, 883, 895 represent moneys to be paid in purchasing N.Y.S.2d 199 (2d Dept. 2010). from or in selling for such owner bonds or certificates secured by such mortgage Here, plaintiffs have established prima facie upon such real property . . . . entitlement to summary judgment by presenting the Consolidated Note and First and Second Mortgages, and Lien Law §2(14) defines a building loan mortgage. an attestation as to the default. Defendant Genwood failed to appear in this action.

Defendant M&T served a Verified Answer with The term "building loan mortgage," Counterclaim and Cross-Claim. M&T alleges that it when used in this chapter, means a entered into an agreement with Driftwood Management, mortgage made pursuant to a building loan LLC, acting in its capacity as managing agent for contract and includes an agreement Genwood to perform certain work in connection with wherein and whereby a building loan improvements to the Premises. M&T was to [*7] be paid mortgage is consolidated with existing $348,300. M&T alleges that it performed services valued mortgages so as to constitute one lien at $299,500 between June 25, 2008 and October 6, 2008 upon the mortgaged property. for which Genwood has failed to pay. On April 8, 2009, M&T filed a mechanics lien in the amount of $299,500. Lien Law §22 requires the filing of the building loan The lien was extended on March 18, 2010. By its contract with the County Clerk. "If not so filed the counterclaim and cross-claim, M&T seeks a interest of each party to such contact in the real property determination it has a valid and subsisting lien upon the affected thereby, is subject to the lien and claim of a interst of the owner of the premises, a determination of person who shall thereafter file a notice of lien under this the amount due under its mechanics lien, enforcement of chapter." Lien Law § 22. The purpose of this section is the lien, and a determination of the validity, extent and "to readily enable a contractor [*9] to learn exactly what priority of the claims and liens asserted in this action. sum the loan in fact made available to the owner of the real estate for the project." Nanuet Nat'l Bank v. The consolidated mortgage was filed on February 6, Eckerson Terrace, Inc., 47 N.Y.2d 243, 391 N.E.2d 983, 2007. The second mortgage was filed on August 2, 2007. 417 N.Y.S.2d 901 (1979). If § 22 applies to the Loan Nevertheless, as noted, defendant M&T contends that its Agreement, then plaintiffs mortgages would be mechanics lien, originally filed on April 8, 2009 and subordinate to the M&T's subsequently filed mechanics subsequently extended, is superior to plaintiffs' lien as it is undisputed that plaintiffs did not file any mortgages, M&T contends that the First and Second documents pursuant to § 22. This section imposes a Mortgage were made pursuant to a building loan "subordination penalty" for failure by the lender to agreement, which was not filed pursuant to Lien Law § comply with its requirements. Nanuet Nat'l Bank v. 22, and that, therefore, its mechanics lien is superior. Page 4 2011 N.Y. Misc. LEXIS 6154, *9

Eckerson Terrace, Inc., 47 N.Y.2d at 248. To the extent it being said that they are, in the eyes of the law, one that this outcome may be harsh, "it must be understood instrument"); see also, BWA Corp. v. Alltrans Exp. that we are here dealing not with equitable redress, but U.S.A., Inc., 112 A.D.2d 850, 493 N.Y.S.2d 1 (1st Dept. with a statutorily imposed penalty." Atlantic Bank v. 1985) (holding that in the absence of anything to indicate Forrest House Holding Co., 234 A.D.2d 491, 492, 651 a contrary intention, "where several instruments N.Y.S.2d 607 (2d Dept. 1996). constitute part of the same transaction, they must be interpreted together"). The Loan Agreement, First Repair Plaintiff contends that the Consolidated Note, Loan Escrow Agreement and Second Repair Escrow Agreement, First and Second Mortgage do not contain an Agreement were executed contemporaneously on January express promise on the part of borrower, or an express 30, 2007. Further, each of these agreements was executed promise on the part of LBH to fund the construction of a as part of the Consolidated Note secured by the First and building or improvements as is required under the Second Mortgage. Simply, these documents were in fact definition of a building loan contract in the Lien Law. "executed by the same parties, for the same purpose, and Plaintiffs contend that the game is true for the Loan in the course [*12] of the same transaction." 22 N.Y. Agreement. According [*10] to plaintiffs, there are no Jur.2d, Contracts §255. express agreements as required under Lien Law. "Rather, the Loan Agreement merely requires that Borrower place Plaintiffs next argue that, even if the Loan certain funds advanced by LBH in interest bearing Agreement, First Repair Escrow Agreement and Second escrow accounts, including the "Immediate Repair Work Repair Escrow Agreement are read together, the First and Deposit," "PIP Deposit" and "Additional PIP Deposit," to Second Repair Escrow Agreements do not contain the be disbursed in accordance with the First and Second essential details to evidence a building loan agreement. Repair Agreement." Memorandum of Law in Support of The court disagrees. These loan documents "on [their] Plaintiffs' Renewed Motion for Summary Judgment, p. face comport[] with the definition of a building loan 11. Accordingly, plaintiffs assert that there is no building contract." Altshuler Shaham Provident Funds, Ltd, v. loan contract and the requirements of Lien Law § 22 do GML Tower LLC, 28 Misc.3d 475, 479-480, 900 not apply. N.Y.S.2d 846 (Sup. Ct. 2010), aff'd for reasons stated below, Altshuler Shaham Provident Funds. Ltd. v Gml Defendant contends that the Loan Agreement, read Tower LLC, 83 A.D.3d 1563, 921 N.Y.S.2d 601 (4th together with the First and Second Repair Escrow Dept. 2011). The Loan Agreement provides at paragraph Agreements, is a building loan contract. Plaintiffs argue 7(c) that the borrower has deposited $1,750,000 (the "PIP that the First and Second Repair Agreements cannot be Deposit") and $122,750 (the "Immediate Repair Work considered when determining if the Loan Agreement is a Deposit") in escrow accounts, that "Lender is funding the building loan contract as those documents are PIP Deposit and Immediate Repair Work Deposit, and supplemental to the agreement itself and cannot change that the funds were to be disbursed in accordance with the the nature of the transaction. First Repair Escrow Agreement. At paragraph 8(d), the Loan agreement provides that an additional sum of The court finds that the Loan Agreement and First $1,750,000 (the "Additional PIP Deposit") "funded by the and Second Repair Escrow Agreements must be read Lender" is to be deposited in escrow no later that six together for purposes of determining whether this is a months after [*13] the date of the Loan Agreement in building loan contract. In general, written contracts "connection with the further performance by Borrower of executed simultaneously [*11] and for the same purpose the repair and renovation work required under the must be read and interpreted together. Nau v. Vulcan Rail Franchise Agreement." & Constr, Co., 286 N.Y. 188, 197, 36 N.E.2d 106 (1941); Manufacturers & Traders Trust Co. v. Erie County Indus. The First Repair Escrow Agreement "requires that Dev. Agency, 269 A.D.2d 871, 872, 703 N.Y.S.2d 636 the Borrower perform (a) the repairs and deferred [4th Dept. 2000]); see also 22 N.Y. Jur.2d, Contracts maintenance at the Project listed on Exhibit A hereto §255 ("In the absence of anything to indicate the contrary (collectively, the "PIP Work") and Exhibit B hereto intention, instruments executed at the same time, by the (collectively, the "Immediate Repair Work"). First Repair same parties, for the same purpose, and in the course of Escrow Agreement, 3rd Whereas Clause, p. 1 (emphasis the same transaction will be read and interpreted together, supplied). The First Repair Escrow Agreement also Page 5 2011 N.Y. Misc. LEXIS 6154, *13

provides that $1,750,000 will be deposited in the "PIP to the consolidated mortgage ($12,850,000) were Escrow" and $122,750 in the "Immediate Repair Escrow" disbursed all on the same day, January 30, 2007, the to be disbursed as provided the First Repair Escrow $12,850,000 loan cannot be a building loan because such Agreement. Id. The purpose of the deposits is "[t]o secure loans must be disbursed in installments, not in a lump Borrower's obligation to complete the Work [PIP Work sum. Plaintiffs make the same argument as to the second and Immediate Repair Work]." First Repair Escrow $1,750,000 which was disbursed on July 30, 2007. Agreement, ¶1(a)(emphasis supplied). The escrows established "shall be used exclusively in respect of the While it is true that the entire amount of the PIP Work and the Immediate Repair Work." Id., at ¶3. $12,850,000 loan secured by the Consolidated Mortgage The First Repair Escrow provides also that the lender was in a sense disbursed on January 30, 2007, the money shall release funds from the escrow accounts for work was not made available to the Borrower in a lump sum. covered under the agreement and provided the amount By the terms of the Loan Agreement, and First and payable is reasonable. Second Escrow Agreements, the borrower was required to immediately fund the escrow accounts described in The Second [*14] Repair Escrow, also executed those agreements with part of the funds disbursed on that January 30, 2007, provides for an additional sum of date. The [*16] funds could not be used for any other $1,750,000, secured by the Second Mortgage, to be purpose than the PIP Repair Work and Immediate Repair placed in an escrow account to also secure borrower's Work, and could only be disbursed by permission of the obligation to complete the PIP work and that this money Lender upon request of the borrower as the Work was shall be used exclusively to complete the work. completed. Use of this escrow arrangement, which some commentators have described as an attempt by lenders to Plaintiffs argue that the PIP Work, found at Exhibit circumvent the Lien Law §22 requirements,1 still requires A to both the First and Second Repair Escrow periodic disbursement as the Work is completed by the Agreements, is merely a list of standards required to Lender of the monies dedicated to completion of the ensure compliance with the hotel's franchise agreement. Work. According to plaintiffs, it does not mandate what repairs must be made, but only states the condition the hotel 1 "Some lenders try to avoid the Lien Law must be in, and does not state the amounts allocated to restrictions by disbursing the entire loan proceeds each item. Further, spending of any funds in the PIP at closing into an escrow account, and then Escrow was within the discretion of the Borrower. disbursing from the escrow account to pay the borrower's construction costs, on the theory that Plaintiffs' position is not supported by the the terms the loan is not a 'building loan' since the lender is of the First and Second Repair Escrow Agreements. As not making advances after the closing. This the "Lender requires that Borrower perform [the PIP escrow arrangement is not recommended since it Work and Immediate Repair Work [the "Work"]" and the may not comply with the Lien Law." NY CLS money in the escrow accounts was to ensure the Lien §22 (Matthew Bender)(available on LEXIS) Borrower's "obligation" to complete the Work. First and Practice Insights: Use of Building Loan Second Repair Escrow Agreements, 3rd Whereas Clause, Agreements and Mortgages, by Brook Boyd, Esq. and ¶1(a). In accordance with the above, th(c) court denies Plaintiffs next argue that there was no timeline for plaintiffs' motion to dismiss the counterclaim of M&T completion [*15] of the work. The court does not agree. and to sever its crossclaim. CPLR 3212(b) states: The Work is to be completed no later than 12 months after the contract date, January 30, 2007, and in the case If it shall appear [*17] that any party of the Immediate Repair Work, no later than six months other than the moving party is entitled to a after the contract date. Id., at ¶ 2(a). To add to the point summary judgment, the court may grant above, that the PIP Work was to be completed no later such judgment without the necessity of a than 12 months supports M&T's position that the work cross-motion. was not discretionary. See also, Dickson v. Slezak, 73 A.D.3d 1249, fn. 3, 902 Plaintiffs also argue that because the funds pursuant Page 6 2011 N.Y. Misc. LEXIS 6154, *17

N.Y.S.2d 206 (3d Dept. 2010); Perkins v. Kapsokefalos, John and Mary Doe be stricken as parties. 57 A.D.3d 1189, 1191, 869 N.Y.S.2d 667 (3d Dept. 2008). The authority extends, however, only to a cause of Genwood's motion to quash the subpoena is rendered action or issue before the court. See Dunham v. Hilco moot by the above decision finding its lien is superior to Constr. Co., Inc., 89 N.Y.2d 425, 430, 676 N.E.2d 1178, that of plaintiffs. 654 N.Y.S.2d 335 (1996). Searching the record, the court finds that, by operation of Lien Law § 22, M&T's SO ORDERED. mechanics lien, originally filed April 8, 2010, has priority /s/ Kenneth R. Fisher over plaintiffs' First and Second Mortgages. KENNETH R. FISHER Therefore, subject to M&T's mechanics lien, plaintiffs are granted summary judgment on its JUSTICE SUPREME COURT foreclosure cause of action as to the mortgages and enforcement of the security agreement. The matter will DATED: October 20, 2011 be referred to a referee upon submission of an appropriate order. Plaintiffs are granted their relief requesting that Rochester, [*18] New York Exhibit OO: Aspro Mechanical Contracting, Inc. v. Fleetbank, N.A. 1 N.Y.3D 324 773 N.Y.S. 2D 735 Page 1

3 of 52 DOCUMENTS

Aspro Mechanical Contracting, Inc., et al., Respondents, v. Fleet Bank, N.A., Appellant.

No. 7

COURT OF APPEALS OF NEW YORK

1 N.Y.3d 324; 805 N.E.2d 1037; 773 N.Y.S.2d 735; 2004 N.Y. LEXIS 140

January 7, 2004, Argued February 12, 2004, Decided

SUBSEQUENT HISTORY: appealed, as to liability, from the affirmance by the Reargument denied by Aspro Mech. Contr. v. Fleet Bank, Appellate Division (New York) of the trial court's entry N.A., 2 N.Y.3d 760, 811 N.E.2d 39, 2004 N.Y. LEXIS of summary judgment in favor of respondent 500, 778 N.Y.S.2d 777 (N.Y., Mar. 25, 2004) subcontractors in the subcontractors' suit alleging that the mortgagee had diverted trust funds by paying itself prior PRIOR HISTORY: Appeal, by permission of the to paying the subcontractors' claims. Court of Appeals, from a judgment of the Supreme Court, Kings County (Lewis L. Douglass, J.), entered February OVERVIEW: The owner assigned its rights to payments 25, 2003. The Supreme Court, pursuant to the parties' from the city under a turnkey contract of sale to the stipulation, awarded plaintiffs damages against defendant mortgagee as additional security for a construction loan. in the total sum of $ 1,904,923.48. The appeal brings up The mortgagee argued that the payments it made to itself for review a prior nonfinal order of the Appellate were permissible as its recorded loans were superior to Division of the Supreme Court in the Second Judicial the subcontractors' claims. The state's highest court held Department, entered May 20, 2002. The Appellate that the payments were trust assets under N.Y. Lien Law Division had affirmed an order of the Supreme Court, art. 3-A subject to the subcontractors' claims. The Kings County (Gerald S. Held, J.), which granted assignment from the owner rendered the mortgagee a plaintiffs' motion for summary judgment on the issue of statutory owner-trustee. As a statutory trustee, the liability and denied defendant's cross motion for mortgagee was obligated to act as a fiduciary manager of summary judgment dismissing the complaint. the funds. The mortgagee's application of the trust assets Aspro Mech. Contr. v. Fleet Bank, 293 A.D.2d 97, 742 to repay its loans, without acknowledging its status as N.Y.S.2d 361, 2002 N.Y. App. Div. LEXIS 5265 (N.Y. trustee and providing notice to trust beneficiaries of the App. Div. 2d Dep't, 2002) affirmed transfer, constituted a breach of fiduciary duty. Had the mortgagee filed a notice of lending regarding its use of DISPOSITION: Judgment of trial court and order of the trust assets to repay itself, the beneficiaries could the appellate division affirmed. have ascertained that the trust assets were being depleted and the mortgagee was a trustee acting as both transferor CASE SUMMARY: and transferee of those funds. Nothing in the filings relied upon by the mortgagee imparted this information to the trust beneficiaries. PROCEDURAL POSTURE: Appellant mortgagee Page 2 1 N.Y.3d 324, *; 805 N.E.2d 1037, **; 773 N.Y.S.2d 735, ***; 2004 N.Y. LEXIS 140

OUTCOME: The judgments entered by the trial court designated funds received by owners, contractors and and the affirmance by the intermediate court were subcontractors in connection with improvements of real affirmed. property are trust assets and that a trust begins when any asset thereof comes into existence, whether or not there CORE TERMS: trust assets, notice, trust beneficiaries, shall be at that time any beneficiary of the trust. N.Y. mortgage, beneficiary, trust funds, lending, repay, Lien Law § 70(1) and (3). subcontractor, contractor, diversion, turnkey, building loan mortgage, special proceeding, fiduciary, repayment, lender, owed, Report of NY Law, construction loan, Real Property Law > Nonmortgage Liens > Mechanics' assigned, laborer, loan agreement, fiduciary duty, Liens affirmative defenses, owner-trustee, depletion, diverted, [HN5] Funds received by an owner under building loan paying, summary judgment contracts and building loan mortgages are trust assets and the statute requires owner-trustees to apply such assets LexisNexis(R) Headnotes for payment of the "cost of improvement." N.Y. Lien Law §§ 70(5) and 71(1). Cost of improvement is defined in N. Y. Lien Law § 2(5) to encompass expenditures incurred by the owner in paying the claims of a contractor, an architect, engineer or surveyor, a Real Property Law > Nonmortgage Liens > Mechanics' subcontractor, laborer and materialman, arising out of the Liens improvement, and shall also include sums paid to [HN1] N.Y. Lien Law art. 3-A creates trust funds out of discharge building loan mortgages whenever recorded. certain construction payments or funds to assure payment of subcontractors, suppliers, architects, engineers, laborers, as well as specified taxes and expenses of Real Property Law > Nonmortgage Liens > Mechanics' construction. N.Y. Lien Law §§ 70, 71. Liens [HN6] The use of trust assets for a non-trust purpose--that is, a purpose outside the scope of the cost Real Property Law > Nonmortgage Liens > Mechanics' of improvement--is deemed a diversion of trust assets, Liens whether or not there are trust claims in existence at the [HN2] The appellate court has repeatedly recognized that time of the transaction, and if the diversion occurs by the the primary purpose of N.Y. Lien Law art. 3-A and its voluntary act of the trustee or by his consent such act or predecessors is to ensure that those who have directly consent is a breach of trust. N.Y. Lien Law § 72. expended labor and materials to improve real property or a public improvement at the direction of the owner or a general contractor receive payment for the work actually Real Property Law > Nonmortgage Liens > Mechanics' performed. Liens [HN7] N.Y. Lien Law § 74(1) expressly vests discretion in the trustee to determine the order and manner of Real Property Law > Nonmortgage Liens > Mechanics' payment of any trust claims and to apply any trust asset Liens to any purpose of the trust. [HN3] Enactment of the trust fund provisions has been prompted by the frequency of cases in which laborers and materialmen were in fact not paid. The trust concept is Real Property Law > Nonmortgage Liens > Mechanics' intended precisely to forbid that an owner, contractor or Liens subcontractor act merely as entrepreneur and is intended [HN8] The New York Lien Law incorporates a to require that he act, instead, as fiduciary manager of the mechanism for trustees to alert beneficiaries to the fixed amounts provided for the operation. distribution of trust assets to repay advances made by lenders. Trustees or lender-transferees may file a "notice of lending" to protect the lender's right to repayment from Real Property Law > Nonmortgage Liens > Mechanics' trust funds (N.Y. Lien Law § 73). Such notice must be Liens filed in the county clerk's office in the "lien docket" or [HN4] The New York Lien Law establishes that Page 3 1 N.Y.3d 324, *; 805 N.E.2d 1037, **; 773 N.Y.S.2d 735, ***; 2004 N.Y. LEXIS 140 other official record and indexed by the name of the beneficiaries. trustee to whom the advances are made. Section 73(3)(a). HEADNOTES

Real Property Law > Nonmortgage Liens > Mechanics' Liens -- Trusts for Laborers and Materialmen -- Liens Diversion of Trust Assets [HN9] A "notice of lending" is to be filed within five days of the payment and sets forth the names and Defendant mortgagee bank, having taken an addresses of the persons making the advances and to assignment of a turnkey contract of sale as security for a whom or on whose behalf they are made, the date of any construction loan, was liable as a statutory trustee under advances made prior to the filing for which the filing is Lien Law article 3-A for the unpaid claims of plaintiff intended to be effective and the maximum balance of subcontractors. The funds owed under the contract were advances outstanding to be permitted by the lender trust assets subject to the rights of trust beneficiaries, and pursuant to the notice. N.Y. Lien Law § 73(3)(b). the direct payment of the sale proceeds to defendant rendered defendant a statutory owner-trustee obligated to administer the trust solely in the interest of the Real Property Law > Nonmortgage Liens > Mechanics' beneficiaries. Defendant's application of the trust assets Liens to repay its construction loan--without acknowledging its [HN10] The filing provisions in N.Y. Lien Law § 73 status as trustee and providing notice to trust beneficiaries promote the legislative intent to assure public notice of of the transfer--constituted a breach of its fiduciary duty. any transaction of the owner, contractor or subcontractor The filing by defendant of a notice of lending regarding that may lead to depletion of funds available for future its use of the trust assets to repay itself would have trust claims, even where the depletion merely repays satisfied defendant's duty to provide notice to the trust advances that were in fact used to pay trust claims beneficiaries of its use of trust assets to discharge the accruing at an earlier date. Such record notice provides debt. persons who furnish materials and services in reliance on the trust assets receivable by the trustee at a later stage of COUNSEL: Cleary, Gottlieb, Steen & Hamilton, New the improvement notice that those assets have been York City (Evan A. Davis, Mitchell A. Lowenthal and anticipated for current expense. Rupa Mitra of counsel), for appellant. I. Defendant-appellant was not required to file a notice of Real Property Law > Nonmortgage Liens > Mechanics' lending. (United Lakeland A.C. Co. v Liens Ahneman-Christiansen, Inc., 33 Misc. 2d 606, 226 [HN11] Pursuant to N.Y. Lien Law § 73, the proper filing N.Y.S.2d 532, 18 A.D.2d 1022, 239 N.Y.S.2d 38; Heard of a "notice of lending" is an affirmative defense to an v Cuomo, 80 N.Y.2d 684, 610 N.E.2d 348, 594 N.Y.S.2d action charging a trustee with a diversion of trust assets 675; Matter of ELRAC, Inc. v White, 299 A.D.2d 546, or an action to recover diverted assets from a transferee. 750 N.Y.S.2d 641; Matter of Kamhi v Planning Bd. of In an action against a trustee, the notice of lending Town of Yorktown, 59 N.Y.2d 385, 452 N.E.2d 1193, 465 evidences that the alleged diversion was made as security N.Y.S.2d 865.) II. The lower courts failed to construe the for or in consideration of or in repayment of advances statute in light of all its purposes, including its purpose to made to him as trustee or on his behalf as trustee, and that strike a balance. (Matter of Judge Rotenberg Educ. Ctr. v such advances were actually applied for a purpose of the Maul, 91 N.Y.2d 298, 693 N.E.2d 200, 670 N.Y.S.2d trust. Section 73(2). 173; Majewski v Broadalbin-Perth Cent. School Dist., 91 N.Y.2d 577, 696 N.E.2d 978, 673 N.Y.S.2d 966; Matter of Duell v Condon, 84 N.Y.2d 773, 647 N.E.2d 96, 622 Real Property Law > Nonmortgage Liens > Mechanics' N.Y.S.2d 891; Le Drugstore Etats Unis v New York State Liens Bd. of Pharm., 33 N.Y.2d 298, 307 N.E.2d 249, 352 [HN12] A statutory trustee is obligated to act as a N.Y.S.2d 188; New York State Bridge Auth. v Moore, 299 fiduciary manager of the turnkey contract funds, owes the N.Y. 410, 87 N.E.2d 432.) beneficiaries a duty of loyalty, and is required to administer the trust solely in the interest of the Zisholtz & Zisholtz, LLP, Mineola (Stuart S. Zisholtz of counsel), for respondents. I. Appellant failed to file a Page 4 1 N.Y.3d 324, *; 805 N.E.2d 1037, **; 773 N.Y.S.2d 735, ***; 2004 N.Y. LEXIS 140 notice of assignment and a notice of lending. (National Norstar Bank made a construction loan to Berry Sur. Corp. v Fishkill Natl. Bank, 61 Misc. 2d 579, 306 Street in 1992 as evidenced by a building and project loan N.Y.S.2d 122, 37 A.D.2d 537, 322 N.Y.S.2d 980; agreement, building loan mortgage and project loan Lincoln Natl. Bank of City of N.Y. v Pierce Co., 228 N.Y. mortgage. The loan agreement and mortgages were filed 359, 127 N.E. 253; American Blower Corp. v James with the Kings County City Register's Office in Talcott, Inc., 10 N.Y.2d 282, 176 N.E.2d 833, 219 accordance with section 22 of the Lien Law and the N.Y.S.2d 263; Adirondack Trust Co. v Bien & Assoc., mortgages contained the requisite Lien Law § 13 168 Misc. 2d 919, 645 N.Y.S.2d 288; Edison Elec. covenant stating that the mortgages were subject to the Illuminating Co. of Brooklyn v Frick Co., 221 N.Y. 1, trust provisions of that section. 116 N.E. 369; General Ins. Co. of Am. v Tilcon N.Y., 294 A.D.2d 195, 741 N.Y.S.2d 693.) II. Appellant diverted As additional security for the loan, Berry Street trust funds. (Canron Corp. v City of New York, 214 simultaneously assigned all of its right, title and interest A.D.2d 115, 631 N.Y.S.2d 642; Raisler Corp. v Uris 55 in the turnkey contract to Norstar (hereinafter referred to Water St. Co., 91 Misc. 2d 217, 397 N.Y.S.2d 668; Eljam as Fleet, Norstar's successor in interest and the defendant Mason Supply v I.F. Assoc. Corp., 84 A.D.2d 720, 444 here). In conjunction with the assignment, NYCHA N.Y.S.2d 96; Glens Falls Ins. Co. v Schwab Bros. agreed to make payments directly to Fleet until Fleet Trucking, 55 Misc. 2d 324, 285 N.Y.S.2d 204; New York notified NYCHA that Fleet's loans to Berry Street were Natl. Bank v Primalto Dev. & Constr. Co., 270 A.D.2d fully repaid. The filed mortgages revealed that Berry 22, 703 N.Y.S.2d 480; Caristo Constr. Corp. v Diners Street had assigned its turnkey contract to Fleet; Fin. Corp., 21 N.Y.2d 507, 236 N.E.2d 461, 289 [**1038] [***736] however, the specific rights and N.Y.S.2d 175; West-Fair Elec. Contrs. v Aetna Cas. & responsibilities assigned were not disclosed. The Sur. Co., 87 N.Y.2d 148, 661 N.E.2d 967, 638 N.Y.S.2d assignment itself was not filed. 394; Naiztat Iron Works v Tri-Neck Constr. Corp., 62 Misc. 2d 228, 308 N.Y.S.2d 427; Glazer v Alison Homes NYCHA purchased the three sites and their Corp., 62 Misc. 2d 1017, 309 N.Y.S.2d 381; Schwadron improvements from Berry Street over the course of three v Freund, 69 Misc. 2d 342, 329 N.Y.S.2d 945.) III. years. Because Berry Street had not yet fully repaid the Appellant's attempt to raise new issues on appeal should construction loan to Fleet, NYCHA paid the purchase not be countenanced. (Sacks v Stewart, 75 A.D.2d 536, amounts for each improved parcel directly to Fleet. Fleet 427 N.Y.S.2d 20; Fonda v Nationwide Mut. Fire Ins. Co., applied these amounts to the debt owed it by Berry Street 99 A.D.2d 680, 472 N.Y.S.2d 53; Broida v Bancroft, 103 under the loan agreement and eventually discharged its A.D.2d 88, 478 N.Y.S.2d 333.) mortgages on the properties. Plaintiffs --individuals and entities who had JUDGES: Opinion by Judge Graffeo. Chief Judge Kaye subcontracted with Berry Street to provide labor, services and Judges George Smith, Ciparick, Rosenblatt and Read and materials for the project--commenced a special concur; Judge Robert Smith took no part. proceeding to recover Lien Law article 3-A [*327] trust funds allegedly diverted by Fleet and NYCHA. Fleet OPINION BY: GRAFFEO moved to dismiss the special proceeding, arguing that its status in the transaction was solely that of a OPINION lender-mortgagee and not a trustee subject to article 3-A [***735] [**1037] [*326] Graffeo, J. of the Lien Law. Plaintiffs opposed the motion and cross-moved to amend the petition to add claims In 1989, Berry Street Corporation entered into a pertaining to Berry Street's assignment of its turnkey turnkey contract of sale with the New York City Housing contract rights to Fleet, which plaintiffs alleged they Authority (NYCHA) whereby Berry Street would acquire learned of only upon receipt of NYCHA's answer in the title to three parcels of land in Brooklyn, construct special proceeding. residential buildings on the parcels and convey title to the improved property to NYCHA. The contract specified Supreme Court denied Fleet's motion to dismiss and periodic payments from NYCHA to Berry Street and its granted plaintiffs' cross motion to file an amended general contractor as the improvements were completed. petition. Ultimately, the special proceeding was dismissed without prejudice, and plaintiffs commenced Page 5 1 N.Y.3d 324, *327; 805 N.E.2d 1037, **1038; 773 N.Y.S.2d 735, ***736; 2004 N.Y. LEXIS 140 this action pursuant to Lien Law § 77. 1 In the complaint, Article 3-A of the Lien Law [HN1] creates "trust plaintiffs alleged that they were owed monies on their funds out of certain construction payments or funds to subcontracts and that Fleet had diverted trust funds by assure payment of subcontractors, suppliers, architects, paying itself prior to paying plaintiffs' claims. Plaintiffs engineers, laborers, as well as specified taxes and urged that Fleet's failure to file a notice of assignment or expenses of construction" (Caristo Constr. Corp. v a notice of lending deprived Fleet of any affirmative Diners Fin. Corp., 21 N.Y.2d 507, 512, 236 N.E.2d 461, defenses it might otherwise have had and sought to 289 N.Y.S.2d 175 [1968]; see Lien Law §§70, 71). recover for Fleet's "violation of [its] fiduciary [HN2] We have repeatedly recognized that the "primary relationship under the trust." purpose of article 3-A and its predecessors [is] 'to ensure that "those who have directly expended labor and 1 Upon plaintiffs' motion, the action was materials to improve real property [or a public certified as a class action. improvement] at the direction of the owner or a general contractor" receive payment for the work actually After denial of its motion to dismiss the new action, performed" (Matter of RLI Ins. Co. v New York State Fleet answered and raised numerous affirmative defenses. Dept. of Labor, 97 N.Y.2d 256, 264, 766 N.E.2d 934, 740 As it had contended during the special proceeding, Fleet N.Y.S.2d 272 [2002] [quoting Canron Corp. v City of again asserted that it was "not a statutory trustee and the New York, 89 N.Y.2d 147, 155, 674 N.E.2d 1117, 652 funds paid to Fleet do not constitute trust assets" and that N.Y.S.2d 211 (1996); see also West-Fair Elec. Contrs. v plaintiffs' claims were barred by virtue of Fleet's Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 156-157, 661 "superior mortgage interest." Plaintiffs moved for N.E.2d 967, 638 N.Y.S.2d 394 [1995]). As the Law summary judgment on the issue of liability and Fleet Revision Commission noted in its 1959 Report cross-moved for summary judgment dismissing the recommending numerous amendments to the law, complaint.

Supreme Court granted plaintiffs' motion, denied [HN3] "enactment of the trust fund Fleet's cross motion and ordered a trial on damages. 2 On provisions was prompted by the frequency Fleet's appeal, the Appellate Division affirmed, holding of cases in which laborers and that Fleet's repayment to itself of the loans made to Berry materialmen were in fact not paid. The Street was a diversion of trust assets. The parties trust concept was intended precisely to stipulated to damages and judgment was entered for forbid that an owner, contractor or plaintiffs in the amount of $ 1,904,923.48. Fleet now subcontractor act merely as entrepreneur appeals the judgment, bringing up for review the and was intended to require that he act, Appellate Division's order of affirmance. instead, as fiduciary manager of the fixed amounts provided for the operation" (1959 2 Supreme Court granted NYCHA's motion for Report of NY Law Rev Commn, at 214, summary judgment dismissing the claims against reprinted in 1959 NY Legis Doc No. 65, at it so it is no longer a party in this action. 30).

In this appeal, Fleet no longer disputes that the payments it received via the assignment constituted To ensure this end, [HN4] the Lien Law establishes article 3-A trust assets [*328] and concedes its trustee that designated funds received by owners, contractors and status as a result of the assignment. Fleet now argues that subcontractors in connection with improvements of real its self-payment--at a time when it contended that the property are trust assets and that a trust begins "when any funds were not trust assets--was nevertheless permissible asset thereof comes into existence, whether or not there because it used the money to pay its properly [**1039] shall be at that time any beneficiary of the trust" (Lien [***737] recorded secured loans, which were superior to Law § 70 [1], [3]; see City of New York v Cross Bay plaintiffs' claims pursuant to the Lien Law's statutory Contr. Corp., 93 N.Y.2d 14, 19, 709 N.E.2d 459, 686 priority provisions. N.Y.S.2d 750 [1999]. [HN5] ). Funds received by an owner under building loan contracts and building loan The Lien Law Trust Provisions [*329] mortgages are trust assets and the statute requires owner-trustees to apply such assets for payment of the Page 6 1 N.Y.3d 324, *329; 805 N.E.2d 1037, **1039; 773 N.Y.S.2d 735, ***737; 2004 N.Y. LEXIS 140

"cost of improvement" (see Lien Law § 70 [5]; § 71 [1]). [*330] [HN10] These filing provisions promote the Cost of improvement is defined in the Lien Law to legislative intent to assure "public notice of any encompass "expenditures incurred by the owner in paying transaction of the owner, contractor or subcontractor that the claims of a contractor, an architect, engineer or may lead to depletion of funds available for future trust surveyor, a subcontractor, laborer and materialman, claims, even where the depletion merely repays advances arising out of the improvement, . . . and shall also include that were in fact used to pay trust claims accruing at an . . . sums paid to discharge building loan mortgages earlier [d]ate" (1959 Report of NY Law Rev Commn, at whenever recorded" (id. at § 2 [5]). [HN6] The use of 216). Such record notice provides "persons who furnish trust assets for a nontrust purpose--that is, a purpose materials and services in reliance on the trust assets outside the scope of the cost of improvement--is deemed receivable by the trustee at a later stage of the "a diversion of trust assets, whether or not there are trust improvement . . . notice that those assets have been claims in existence at the time of the transaction, and if anticipated for current expense" (id.). the diversion occurs by the voluntary act of the trustee or by his consent such act or consent is a breach of trust" [HN11] Pursuant to section 73 of the Lien Law, the (Lien Law § 72). proper filing of a "Notice of Lending" is an affirmative defense to an action charging a trustee with a diversion of The Lien Law further imposes duties upon trustees in trust assets or an action to recover diverted assets from a the operation of the trust. A statutory trustee must transferee. In an action against a trustee, the notice of maintain books and records of the trust including entries lending evidences that the alleged diversion "was made for trust assets receivable, trust accounts payable, trust as security for or in consideration of or in repayment of funds received and trust payments made with trust assets, advances made to him as trustee or on his behalf as and make those records available for inspection by trustee . . . , and that such advances were actually applied beneficiaries (see id. at §§75, 76). In addition, the records for a purpose of the trust" (id. at § 73 [2]). must reflect any [**1040] [***738] "[t]ransfers in repayment of or to secure advances made pursuant to a Application of the Statute 'Notice of Lending" "(id. at § 75 [3] [E]). [HN7] The statute expressly vests discretion in the trustee "to Under Lien Law article 3-A, the funds NYCHA determine the order and manner of payment of any trust owed Berry Street under the turnkey sale contract were claims and to apply any trust asset to any purpose of the trust assets subject to the rights of trust beneficiaries and trust" (id. at § 74 [1]). it is undisputed that plaintiffs, as subcontractors on the project, are trust beneficiaries (see Lien Law §§70, 71). Of special importance in this case, [HN8] the Lien Berry Street assigned its rights under the NYCHA Law also incorporates a mechanism for trustees to alert contract to Fleet and, as a result, NYCHA's direct beneficiaries to the distribution of trust assets to repay payment of the sale proceeds to Fleet rendered Fleet a advances made by lenders (see Postner & Rubin, New statutory owner-trustee. [HN12] As a statutory trustee, York Construction Law Manual §9.76, at 362). Trustees Fleet was obligated to act "as fiduciary manager" of the or lender-transferees may file a "Notice of Lending" to funds (1959 Report of NY Law Rev Commn, at 214). "protect the lender's right to repayment from trust funds" Fleet therefore owed the beneficiaries a duty of loyalty (id.; see Lien Law § 73). Such notice must be filed in the and was required "to administer the trust solely in the county clerk's office in the "lien docket" or other official interest of the beneficiaries" (2A Fratcher, Scott on record and indexed by the name of the trustee to whom Trusts, at §170 [4th ed]; Restatement [Third] of Trusts § the advances are made (see Lien Law § 73 [3] [a]). [HN9] 170 [1]). The notice is to be filed within five days of the payment and sets forth the names and addresses of the persons In these circumstances, Fleet's application of the trust making the advances and to whom or on whose behalf assets to repay its loans to Berry Street--without they are made, the date of any advances made prior to the acknowledging its status as trustee and providing notice filing for which the filing is intended to be effective and to trust beneficiaries of the transfer--constituted a breach "the maximum balance of advances outstanding to be of its fiduciary duty. Fleet asserts that the inclusion of the permitted by the lender pursuant to the notice" (see id. at reference to the assignment in its mortgages was the [3] b] [6]). [**1041] [***739] equivalent of record notice to potential claimants of Fleet's priority interest in the trust Page 7 1 N.Y.3d 324, *330; 805 N.E.2d 1037, **1041; 773 N.Y.S.2d 735, ***739; 2004 N.Y. LEXIS 140 assets. There is no question that by complying with the Law § 73). Nothing in the filings relied upon by Fleet filing and covenant [*331] requirements of Lien Law §§ imparted this information to trust beneficiaries. 3 Hence, 13 (2) and 22, Fleet's building loan mortgages obtained Fleet failed to file any document that served as adequate priority over subsequently filed mechanics' liens. notice to beneficiaries of its status as a trustee and its depletion of trust funds to repay its loans. This argument overlooks the important fiduciary considerations adopted by the Legislature to safeguard 3 Moreover, there is no information in the record trust beneficiaries. Potential trust beneficiaries might indicating whether Fleet complied with the have been able to ascertain Fleet's claim of priority as a statutory record-keeping obligations of trustees secured mortgage lender but nothing in the mortgage (see Lien Law § 75). Such compliance seems documents identified Fleet as a trustee of the article 3-A unlikely considering Fleet's initial posture in this assets. Indeed, Fleet's own posture during the early stages litigation. of this litigation denied that the assignment rendered it a trustee. In essence, Fleet seeks to escape the effect of the Although Fleet breached its fiduciary obligation, the assignment by arguing that plaintiffs should have issue of damages for such a breach is not before us appreciated the implications that Fleet itself refuted. Even because the parties stipulated to damages prior to this if plaintiffs had surmised Fleet's role as the trustee by appeal. Thus, we have no occasion to address the examining the mortgage documents, those filings would conclusion reached by the lower courts that Fleet's not have informed beneficiaries that Fleet planned to use repayment to itself invalidated its statutory priority trust assets to repay itself. [*332] as a secured mortgage lender and rendered Fleet liable to plaintiffs for the full amount of the transferred We conclude that the filing by Fleet of a notice of trust funds. lending--although not necessarily the only device available--would have satisfied Fleet's fiduciary duty to Accordingly, the judgment appealed from and the provide notice to the trust beneficiaries of its use of trust order of the Appellate Division brought up for review assets to discharge Berry Street's debt. Such a filing should be affirmed, with costs. would fulfill the legislative purposes of article 3-A and eliminate any taint of self-dealing by a trustee who is also Chief Judge Kaye and Judges G.B. Smith, Ciparick, a trust beneficiary. Notably, had Fleet filed a notice of Rosenblatt and Read concur; Judge R.S. Smith taking no lending regarding its use of the trust assets to repay itself, part. the beneficiaries could have ascertained that (1) the trust Judgment appealed from and order of the Appellate assets were being depleted and (2) Fleet was a trustee Division brought up for review affirmed, with costs. acting as both transferor and transferee of those funds (see 1959 Report of NY Law Rev Commn, at 216; Lien Exhibit PP: NYCLS Lien § 73

Exhibit QQ: Notice of Lending Form

Exhibit RR: Title Loan Policy Form

Faculty Biographies

Aloysius Stork, Senior Counsel and Vice President, has been with Lex Terrae since 1985 and has been in the title industry since 1982. Al has a solid reputation for reliability and for providing clients with the correct answers to their many complex questions. He currently serves on the legislative committee of the New York State Land Title Association and is a member of the New York City Bar Association. His expertise in a broad array of real estate, transfer tax and mortgage tax issues are at your ready disposal.

[email protected] direct telephone number: 212-716-3281 download vcard

EDUCATION Brooklyn Law School, J.D. 2007 Yeshiva University, B.A. 2004, cum laude

BAR ADMISSIONS 2008, New York 2008, District of Columbia 2007, New Jersey

BIOGRAPHY Ariel Weinstock joined the real estate department in 2007. His practice focuses on real estate and construction matters.

Since joining the firm, Ariel has been involved in numerous real estate transactions including commercial leases, sales, acquisitions and financings. Ariel has also been involved in drafting and negotiating construction agreements, including AIA-based construction documents, for both national and local clients on significant construction projects.

Ariel was recently appointed as the Vice-Chair of the New York County Lawyers’ Association Construction Law Committee and currently serves as Secretary of the Construction Law Committee of the New York State Bar Association’s Real Property Law Section.

COURT ADMISSION U.S. District Court of New Jersey

BAR AFFILIATIONS AND PRESENTATIONS New York County Lawyers’ Association Vice-Chair, Construction Law Committee

New York State Bar Association Secretary, Construction Law Committee, Real Property Section

Lecturer, Default by Owners, Mechanic Lienors and Lenders in Construction Contracts – Remedies for Cure, NYSBA CLE, Hot Topics in Real Property Law and Practice (December, 2010)

Lecturer, Survey Examination, NYSBA CLE, Practical Skills – Purchases and Sales of Homes (November, 2010)

Lecturer, Opening Up: Office Leasing and Renovation Contracts, NYCLA CLE, First Annual Business and Contract Law Institute (September, 2010)

Lecturer, Survey Examination, NYSBA CLE, Practical Skills – Purchases and Sales of Homes (November, 2009)