Foreclosures; Failure to Demonstrate Excusable Default and Meritorious Defense; Parents Gave Power of Attorney to Their Disbarred Attorney Son Who Then Used the Equity in Parents' Home to Purchase a Condominium; Motion to Serve Late Answer Denied; Lenders Entitled to Reply on Statutory Short Form Power of Attorney

A trial court had denied the defendants' motions to file a late answer pursuant to CPLR 3012(d). The Appellate Division (court), “[n]otwithstanding the (defendants') sympathetic position,” held that “denial of their motion for relief…was warranted” and affirmed.

The defendant parents (defendants) owned a Brooklyn home. In 2008, allegedly without their knowledge, their son, also a defendant, used the home “as collateral” for a mortgage loan he used to buy a Manhattan condominium. The plaintiff was a successor mortgagee. The defendants had granted the son “a durable general statutory short form power of attorney,” (POA) “appointing [the son] to act…for all matters listed on the instruments, including 'real estate transactions' and 'banking transactions' with respect to their…[home].”

At the closing on the condominium, the son acted, inter alia, as “borrower” and “attorney-in-fact for the [defendants].” The son had signed “the collateral mortgage on the [defendants'] behalf as their attorney-in-fact.” He also provided “an affidavit of effectiveness, sworn and subscribed before a licensed notary public…with respect to each of the [POAs], in which he swore that each [POA] was a 'valid and subsisting power which has not been revoked' and that he had 'full and unqualified authority to execute all documents.'” The son alleged that after the closing, he could not locate the original POAs and collateral mortgage, and therefore, had never recorded them. The son made the collateral mortgage loan payments for more than three years before he defaulted on Aug. 1, 2011.

On April 18, 2012, the defendants were served with a summons and complaint (complaint) in an action brought by the lender, wherein the lender sought “an order directing the Office of the New York City Register…to accept for recording copies of the [POAs] signed by the [defendants] and the collateral mortgage, because the original documents were lost….” On Sept. 7, 2012, after the defendants failed to appear, the lender moved for a default judgment, “directing that the copies of the [POAs] and collateral mortgage be recorded and to quiet title in its favor.” A court granted that motion and issued an order of default. On Jan. 29, 2013, the defendants were served with a notice of entry of the order of default.

On June 21, 2013, a court entered “a judgment directing that the copies of the [POAs] and collateral mortgage be recorded in the Office of the City Register.” A notice of entry of judgment was served on each of the defendants with a copy of the judgment attached. On Nov. 19, 2013, the lender served a 90-day notice of default on the defendants, pursuant to RPAPL 1304. The notice of default specified that the defendants were 841 days in default on the collateral mortgage and were at risk of losing their home. On Mar. 26, 2014, the plaintiff filed a complaint in the instant action to foreclose against the home and the son's condominium. The defendants were served with copies of the complaint by delivery to a person of suitable age and discretion at their place of residence on April 11, 2014, followed by delivery of copies of the complaint to the defendants at their home address by first class mail on April 17, 2014.

The defendants alleged that it was only when they received the copies of the complaint in the subject action that they learned of the collateral mortgage. They asserted that they thereafter had been assured by their son that “he would 'do everything in his power' to prevent foreclosure on their [home].” However, on May 28, 2014, the defendants' time to answer the complaint expired and they had not appeared in the action. On June 9, 2014, the plaintiff served the defendants with notices of default by first class mail.

On Aug. 20, 2014, the son appeared at a foreclosure settlement conference, admitted the default and indicated that he intended to settle with the lender. After he failed to appear for an adjourned settlement conference, the plaintiff moved for a default judgment. The defendants thereafter retained counsel and rather than opposing the motion for a default judgment, moved on April 23, 2015, for leave to file a late answer. The trial court denied the motion.

On appeal, the defendants argued that the son had used their home as collateral for the mortgage without their knowledge or consent and they relied on their son “to protect their [home] from foreclosure.” They claimed that they had “an excusable default and a meritorious defense.” They argued, inter alia, that “the [POAs]…were deficient because their signatures were obtained…without their knowledge of the documents' true nature and contents.”

The plaintiff challenged the alleged “excusable default,” arguing that the defendants “could have hired counsel other than [their son]” when they first learned of the collateral mortgage and asserted the defendants lacked a “meritorious defense because they each executed a valid [POA] authorizing [the son] to act as their attorney-in-fact.”

The Appellate Division had to consider whether the trial court “providently exercised its discretion” and will consider “the length of the delay, the excuse offered, the extent to which the delay was willful, the possibility of prejudice to adverse parties, and the potential merits of any defense….”

The defendants had not made the subject motion until approximately a year after they learned of the foreclosure action. That fact and “their prior notices of the mortgage at least by April 2012 and of the default by November 2013,” supported denial of the defendants' motion. Although the court was sympathetic to the defendants' argument that they reasonably relied on their son's representation that “he would do everything in his power to prevent” foreclosure on their home, the court viewed such position as “questionable,” since they could not identify any action taken by the son on their behalf after service of the complaint upon them. The court considered that excuse as a “neutral” factor.

As to the “willfulness” factor, the court considered the various notices that the defendants had received and found that although a defendant denied knowledge of the collateral mortgage before commencement of this action, the defendants “were almost certainly knowing participants in the transaction, as they were aware of both the mortgage and its function of enabling (the son) to finance the purchase of the condominium unit using the equity in their [home].” Thus, the “willfulness” factor supported denial of the motion. The court also reasoned that prejudice to the plaintiff by delay in recovering its interest in the property “is substantially neutralized by its delay in pursuing its legal remedies.”

The court then held that “it is not a defense for the [defendants] to state that they were cheated by their son.” The POAs expressly granted the son “full powers” to act on behalf of the defendants “with respect to real estate, banking and loan transactions relating to their [home].” The court also noted the “affidavits of effectiveness” as to the POAs and the fact that the son not only had apparent authority, “but also express, authority to act on the [defendants'] behalf as their attorney-in-fact.” Thus, the court rejected the defendants' assertion that “the [POAs] were fraudulently obtained.” The court further stated:

Neither is it a defense…that [the son] apparently committed fraud in carrying out his duties under the [POAs]. “[A] principal may be held liable…for the misuse by its agent of his apparent authority to defraud a third party who reasonably relies on the appearance of authority, even if the agent commits the fraud solely for his personal benefit, and to the detriment of the principal”.… Because the record…demonstrates the lack of any meritorious defense, this factor weighs strongly in favor of denial of the motion.

The court found that “the lack of a potential meritorious defense,” the lengthy delay, and “the willfulness of the default—weigh against granting the motion.” The court also noted that most of the arguments raised by the dissent were not raised by the defendants and are “contrary to the…statutory scheme regarding short form [POAs] and its…policy considerations.” The court also held that the “limiting language of the [POAs]” did not bar “the son from exercising the broad general powers contained in the instruments except in connection with refinancing the defendants' residence. The court stated that such argument was also not raised before the trial court or the Appellate Division.

Additionally, the court asserted that the defendants never argued that the plaintiff was obligated to refuse “[the son's] exercise of authority over his parents' home because of language in the [POA] purportedly limiting his authority solely to refinancing that property.” The court stated that the law does not require that, “when presented with statutory short form POAs in conjunction with mortgages, a third party, such as [plaintiff] here, is required to look beyond their facial validity and interpret their language to ensure that the named attorney-in-fact is not acting outside the scope of the authority granted.”

The POAs utilized by the son “had been recently executed and were…facially valid at the time of the closing.” Therefore, the plaintiff was entitled to rely on them and review of “the statutory scheme respecting [POAs] makes clear that the dissent's position is contrary to the law.” The court cited “General Obligations Law § 5-1504, which bars lenders…in New York from refusing, without reasonable cause, to honor a statutory short form [POA] that has been properly executed.” A bank is entitled, to not accept such POA if it has “actual knowledge that the principal lacked capacity to subscribe it or was subject to fraud, duress or undue influence in executing it,” or if “the bank has actual notice that the instrument has been terminated or revoked….” The court found that the plaintiff “reasonably relied” on the son's “actual authority to bind his parents to the collateral mortgage….” and the plaintiff was “statutorily bound to honor the documents presented to it, as it had no reasonable cause not to do so.”

The court held that the complaint stated a cause of action, even though “the collateral mortgage secures a nonexistent note, since no note was signed by either of the [defendants] as 'borrower.'” That argument had not been presented to the trial court or the Appellate Division. The court opined that such argument “emphasizes form over substance” and stated that the collateral mortgage, “was clearly intended to secure the [home] and to refer to the adjustable rate note signed by [the son] the same day.” The note and the mortgage referred to the address of the home and the amount of the principal to be paid to the lender.

The court noted that the dissent, citing Ford v. Unity Hosp., (32 NY2d 464), argued that since the son lacked express authority to enter into the subject loan transaction and the lender had relied on “apparent authority,” the lender “had a duty to determine the extent of his authority.” The court found that such argument had not been previously raised and the son's “express authority to engage in the transaction was demonstrated at the closing.” Even if the son “demonstrated only apparent authority,” the court stated that Ford was inapplicable, since it did not involve a context that was governed by statutory authority.

Finally, the court rejected the dissent's reasoning that although POAs preclude “attorneys-in-fact from making gifts, including to themselves, exceeding $10,000,” the son, basically “made a gift to himself of all of the equity in his parents' [home],” thereby “violating his statutory duty to act in the best interests of his principals….” That argument was neither advanced at the trial level nor the appellate court.

The dissent cited “'the strong public policy in favor of resolving cases on the merits'” and “at least two meritorious defenses to this foreclosure proceeding.” The dissent argued that the plaintiff “improperly relied on [POAs] that did not give [the son] actual authority, or necessarily apparent authority, to mortgage his parents' [home].” The subject “mortgage states that it secures a note signed by [defendants], but plaintiff bases its foreclosure action only on a note signed by their son, and no note signed by the senior [defendants] has been produced.” The dissent and the majority agreed that the plaintiff would not suffer prejudice if the defendants were to file a late answer. The dissent believed that “the factors of delay and prejudice weigh in favor of granting the motion.”

The dissent cited the defendants' “reasonable excuse, and evidence of the lack of willfulness in their delay,…,” based on “their reasonable reliance on the representation by their lawyer son,…, that he would appear on their behalf in this action.” The defendants' son was a disbarred lawyer, who had pled guilty to grand larceny “subsequent to the events here at issue.” The dissent asserted that the POA which had been executed by the defendants, was “created for the express, limited purpose of authorizing…the agent to do…all acts connected with the refinance of…2342 Benson Avenue.” Here, the son had purchased a Manhattan condominium with a mortgage of $1.76 million, which encumbered both the condominium and the home. The son had not signed the mortgage as “attorney-in-fact for his parents,” but had signed the mortgage only “in his own capacity as the sole 'borrower' identified in the mortgage.” The mortgage stated that the borrower owned “the property encumbered by the mortgage, although there [was] no evidence that [the son] ever owned the Brooklyn residence.”

Although the collateral mortgage defined the borrower as the defendants and stated that the defendants had signed a note on May 14, 2008, reflecting a debt of $1.76 million, the record did not contain the note executed by the defendants, “either directly or by [POA], and no one has claimed that such a note exists.” The home had not been encumbered by a mortgage at the time of the closing, and there was “no claim that the collateral mortgage constituted a refinance of that property.” The dissent stated that “[n]either [defendant] authorized [the son] to use their [home] as collateral for the purchase of the condominium or to represent that they had borrowed $1.76 million from [plaintiff]” and they did not know at the time that the son had “represented himself to be their attorney-in-fact at the closing” for the $1.76 million loan. The son had never recorded the mortgages or POAs.

The dissent argued that, based on the absence of prejudice to either the plaintiff or the court system and “the potential for injustice in not extending the [defendants'] time to file an answer,” the “denial of [defendants'] motion was an abuse of discretion.”

The dissent also cited “delay in this matter” “attributable to…the court's need to assign a new judge, which did not occur for over a year” and its belief that “it was entirely reasonable” for the defendants to rely on their son's representations, as “an experienced real estate attorney.” The dissent asserted that the delay and default resulted from “their son's…history of defrauding clients, who, in this case, were his parents.” The dissent opined that it was an abuse of discretion to fail to consider the reasonableness of the defendants' excuse and their lack of willfulness. As to delay, the dissent also noted that “the motion court was holding plaintiff's summary judgment motion in abeyance due to the transfer of the matter to a different justice.”

The dissent further argued that “[w]here a motion for leave to file a late answer is made prior to entry of a default judgment, no showing of meritorious defense is required.” However, the dissent believed that the defendants had “demonstrated at least one meritorious defense.” The dissent cited “limiting language” of the POA, which had empowered the agent only to take action “connected with the refinance” of the home. The dissent argued that such language only authorized the son to “'refinance' of the [defendants'] residence” and should have put the plaintiff on notice that the son lacked actual authority and “may not have had apparent authority, to execute the collateral mortgage.” The dissent argued that the defendants had “very explicitly” disputed that the POAs authorized the son to execute a mortgage on their home to obtain a loan to purchase the condominium. The dissent believed that the limiting language on the POA, “should have put the bank on notice” and where a bank relies on the doctrine of apparent authority, “it has a duty to determine the extent of the agent's authority, and whether or not the bank did so is a question of fact.”

The dissent also contended that even if the collateral mortgage did constitute a “refinance,” “each [POA] restricts gifts made by the agent, including to himself, to no more than $10,000 per year.” Here, the son had, in essence, “made a gift to himself of all of the equity in his parents' [home],” which the plaintiff claimed had a value of $918,500 as of Feb. 23, 2015.

Although the majority reasoned that common law agency principles are inapplicable to POAs, because of statutory law, the dissent argued that the POAs were executed and used in April or May 2008 and “the amendments to the General Obligation Law, including those sections relied upon by the majority, were not effective until September 2009.” The subject statutory amendment provided that it would apply only prospectively.

The dissent further argued that the plaintiff had not reasonably relied upon a POA, given the limiting language on the face of the POAs and that “there is…a question of fact as to whether they gave him apparent authority to do so.” The dissent noted that the defendants were “elderly immigrants,” “to whom the agent had a fiduciary duty….” The dissent emphasized that neither the current nor the former version of GOL §5-1504, permitted “a person to honor a [POA] for any purpose other than that explicitly stated.”

Additionally, the dissent cited a potential meritorious defense that there is “facial inadequacy of the foreclosure claim…, based on the documents attached to the [defendants'] motion papers.” The dissent cited the absence of a note secured by the defendants and the defendants denied signing any such agreement with the plaintiff and the record did not contain any note executed by the defendants “either in their own capacity or by [POA], and no one claims that such a note exists.” The majority found that “the collateral mortgage 'was clearly intended to secure the [defendants'] [home] and to refer to the adjustable rate note signed by [the son].” However, the dissent asserted that the court lacked authority to rewrite the collateral mortgage and that if the collateral mortgage contained an error, the remedy was “to seek reformation of the collateral mortgage.” If the plaintiff sought reformation, “it would be required 'to proffer evidence, which…, evinces fraud or mistake and the intended agreement between the parties'….”

Accordingly, the dissent would find that the motion court “abused its discretion” in denying the CPLR 3012(d) motion for permission to file a late answer.

Comment: Adam Leitman Bailey, counsel for the plaintiff, stated that the defendants “had sufficient notice and time to respond, but it failed to do so” and “their defense based on impropriety in the [POAs] was belied by their express, signed, notarized grant of full powers to their son.” He advised that the defendants sought leave to go to the Court of Appeals. Counsel for the defendants could not be reached.

Emigrant Bank v. Rosabianca, App. Div., 1st Dept., Index No. 4227N 850136/14, decided Dec. 14, 2017, Friedman, J.P., Gische, Kapnick, Kahn, Gesmer, JJ. All concur except Gesmer, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John's University School of Law.