Dominion Financial Corporation v. Haimil Realty Corp. et al

UNITED STATES BANKRUPTCY COURT 	Not For Publication
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
:
In re: 	: 	Chapter 11
:
HAIMIL REALTY CORP. 	:
: 	Case No. 14-11779 (MEW)
Debtor. 	:
__________________________________________:
:
DOMINION FINANCIAL CORPORATION, 	:
:
Plaintiff, 	:
v. 	: 	Adv. Pro. No. 14-02052 (MEW)
:
HAIMIL REALTY CORP., NYC DEPARTMENT :
OF FINANCE, NYS DEPARTMENT OF 	:
TAXATION AND FINANCE, and 	:
“JOHN DOE(S) AND JANE DOE(S),” the names 	:
being fictitious and unknown to Plaintiffs, the 	:
persons or parties intended being the tenants, 	:
occupants, persons or entities, if any, having or 	:
claiming an interest in or lien upon the premises 	:
described in the complaint, 	:
:
Defendants. 	:
__________________________________________:
MEMORANDUM DECISION DENYING DEBTOR’S
MOTION FOR SUMMARY JUDGMENT
APPEARANCES:
PICK & ZABICKI LLP
Counsel to the Debtor
369 Lexington Avenue, 12th Floor
New York, New York 10017
By: 	Eric C. Zabicki, Esq.
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GLENN BACKER, ESQ.
Special Counsel to the Debtor
280 Madison Avenue, Suite 300
New York, New York 10016
By: 	Glenn Backer, Esq.
ALLAN B. MENDELSOHN, ESQ.
Counsel to Dominion Financial Corporation
38 New Street
Huntington, New York 11743
By: 	Allan B. Mendelsohn, Esq.
MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion for summary judgment (the “SJ Motion”) filed by defendant
Haimil Realty Corp. (the “Debtor” or “Haimil”), seeking a determination that, based upon the
undisputed facts, (i) the Debtor does not owe any sums to plaintiff, Dominion Financial
Corporation (“Dominion”), with respect to an installment promissory note in the amount of $3.4
million executed by the Debtor in favor of Dominion in December 2004, and (ii) the amended
complaint to foreclose on the mortgage that served as security for the $3.4 million note should be
dismissed.
UNDISPUTED FACTS
The Debtor obtained financing from Dominion in connection with a plan to convert a
building (the “Property”) it owned in New York City into condominium units. 	In December
2004, the Debtor executed a $3.4 million note at 12% interest in favor of Dominion, secured by a
mortgage on the Property.1 	The $3.4 million note included a provision calling for the payment of
1 The $3.4 million note consolidated two earlier notes evidencing indebtedness of Haimil to Dominion. 	The first was
issued on April 3, 2003 in the amount of $1.8 million and the second, in the amount of $1.6 million, was issued on
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“Additional Interest” equal to 15% of any amount recovered from the sale of condominium units
over $5,500,000 (the “Additional Interest”). 	The $3.4 million note further stated that, following a
default, interest would be payable at the rate of 2% per month. 	The note was scheduled to mature
on December 31, 2005. 	The mortgage provided that upon failure of the Debtor to make any
required payments, including installment payments of principal and interest under the $3.4 million
note, real estate taxes, water assessments, and insurance premiums, the entire unpaid balance
under the $3.4 million note would become due at Dominion’s option. 	The mortgaged Property
was later subdivided into seven separate units, comprised of six residential units and one
commercial unit.
Starting in 2006, Dominion made additional loans to Haimil. 	A $4 million note
evidencing the additional debt was executed in March of 2008 but was back-dated to November
15, 2006. 	The notarization of the $4 million note by Dominion’s attorney was also back-dated to
the 2006 date. 	The $4 million note provided for interest payments at 12% per year and for default
interest at a rate of 2% per month. 	A back-dated “mortgage” that related to the $4 million note
provides that it is “subject and subordinate to” the $3.4 million mortgage. 	However, the mortgage
related to the $4 million note was not recorded and the parties agree that the $4 million note was an
unsecured note.
On August 1, 2007, in connection with certain borrowings made by Dominion from Israel
Discount Bank (“IDB“), the mortgage related to the $3.4 million note was collaterally assigned to
IDB. 	Thus, IDB’s loan to Dominion was secured by an interest in the proceeds of Dominion’s
loan to Haimil. 	Once IDB’s loan to Dominion was fully repaid, the mortgage related to the $3.4
million note was reassigned to Dominion on July 31, 2012.
December 22, 2004, immediately prior to the consolidation of the two notes.
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Five of the residential condominium units were sold and released from the mortgage
securing the $3.4 million note. 	Four of the residential units were sold in 2008 and the fifth unit
was sold in 2010, and a partial release of mortgage was effected as to each unit after its sale. 	The
payments made from the sale proceeds totaled $7,688,144.74. 	Dominion asserts that payments
were applied first to the $4 million note and that after the sale of the fifth unit in 2010, the $4
million note had been paid in full and the principal balance on the $3.4 million note had been
reduced to $1,607,719.23 as of April 28, 2010. 	Haimil contends that prior payments must be
treated as payments on the $3.4 million secured note, and also contends that the payments 	from
the proceeds of the unit sales were sufficient to pay both notes.
On August 29, 2012, Dominion commenced a foreclosure action against the Debtor in New
York Supreme Court, alleging that the Debtor had ceased making installment payments under the
$3.4 million note in May 2010 and had failed to pay real estate taxes. 	On May 1, 2014, the state
court ordered that a receiver be appointed for the penthouse residential unit at the Property. 	In
addition, the parties entered into a stipulation requiring any rents collected with respect to the
commercial unit be applied first to real estate taxes, with any balance segregated until the
conclusion of the case.
On June 11, 2014, Haimil filed a chapter 11 petition and, thereafter, the state court
foreclosure action was removed to this Court. 	Haimil filed the SJ Motion on January 12, 2015, as
well as leave to file an amendment to assert the statute of limitations as an affirmative defense.2
Dominion opposed the request for summary judgment. 	The Court heard argument at a hearing
held on March 11, 2015 (the “Hearing“). 	At the conclusion of the Hearing, the Court rendered its
2 On January 12, 2015, the SJ Motion was mistakenly filed on the docket of the of the Debtor’s main chapter 11 case.
On March 3, 2015, the SJ Motion was filed on the docket of the adversary proceeding, however, it appears that
Dominion received notice of the earlier filing because it correctly filed its opposition to the SJ Motion on the docket of
the adversary proceeding on February 13, 2015.
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decision, briefly stating its reasons, and noting on the record that this written decision would
follow.
DISCUSSION
Federal Rule of Civil Procedure 56(a), made applicable by Federal Rule of Bankruptcy
Procedure 7056, provides that summary judgment shall be rendered “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). 	Haimil contends that there is no genuine issue of material
fact as to whether or not the note in the amount of $3.4 million has already been repaid. 	In
support of that contention, Haimil has made essentially three arguments: (i) the subordination
clause in the unfiled mortgage for the $4 million note requires that payments be applied first to the
$3.4 million note; (ii) the total payments made by Haimil exceeded the principal amount that
Dominion said was outstanding under both notes as of March 12, 2008; and (iii) the words “paid
off” appear on a spreadsheet Dominion prepared, on a line item that appears to refer to the $3.4
million note. 	Haimil also argues that Dominion failed to file a statement in the form required by
Local Bankruptcy Rule 7056-1, and that Dominion therefore should be deemed to have agreed to
the statement of undisputed facts filed by Haimil. 	In addition, Haimil contends that Dominion
acted with “unclean hands,” and that, even if the $3.4 million note were outstanding, any claim on
that note would be barred by the statute of limitations because the state court action was filed more
than six years after the stated maturity of the $3.4 million note. 	Haimil did not assert a statute of
limitations defense in its pleadings but seeks permission to amend its pleadings to add that defense.
1. 	Subordination Provision
The first argument is that the payments made when condominium units were sold were
required to be applied, either by contract or by law, to the secured $3.4 million note and not to the
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other obligation that was outstanding between the parties under the $4 million note. 	In support of
that contention, Haimil has cited to language in the unfiled mortgage for the $4 million note that
states that such mortgage would be subordinate to the mortgage securing the $3.4 million note.
(SJ Motion, Ex. 28) 	It is plain that such language would have entitled a holder of the $3.4 million
note and mortgage to insist, if it so chose, that payments from the proceeds of unit sales be applied
to the repayment of the $3.4 million note rather that the $4 million note. 	However, Hamil has
cited no authority for the proposition that Dominion was required to apply payments in this way.
Parties who hold secured debts may release their liens on some or all of the collateral that
secures their debts and may allow other debts to be paid. 	The subordination language relied upon
by Haimil does not forbid such acts and does not impose a legal obligation on the part of the holder
of the $3.4 million note to apply payments first to that note and not to the $4 million unsecured
note. 	In particular, where both notes here were held by the same party, the Court sees nothing in
the documents that bars application of payments to the $4 million loan. 	The Court will leave open
the question of whether the parties had reached agreements as to how the prior payments were to
be applied. 	For purposes of summary judgment, however, the Court cannot find that the
subordination language has the meaning that Haimil has alleged.
At the Hearing, Haimil also alleged that the subordination language should be construed
against Dominion. 	It is not clear that the language at issue could be construed in the manner that
Haimil contends, no matter which party drafted the provision. 	In addition, no evidence has been
presented as to who drafted the language. 	In fact, Haimil’s counsel made a point during argument
of noting that the paragraph in which the subordination language appears is in a typeface different
from the rest of the document. 	The Court is not in a position to construe the language against any
particular party without any supporting evidence as to which party drafted the provision, and
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declines the request to do so.
2. 	The Allegation that Payments Exceeded the Principal Amount Previously Due
Haimil also seeks summary judgment on the ground that the admitted amount of payments
that were obtained by the lender from the sale of condominium units, in the years 2008 through
2010, exceed the principal amount that Dominion said was outstanding under all of the outstanding
notes as of March 12, 2008. 3 (SJ Motion, Ex. 13). 	Dominion has not challenged the contention
that the amount stated in the March 12, 2008 letter was the amount of the principal that was
outstanding as of that date, and it has not challenged the dollar amounts of the payments that were
made when the condominium units were sold. 	Nevertheless, these facts fall short of showing that
Haimil is entitled to judgment. 	Both the $3.4 million note and the $4 million note require
payments of interest at the rate of 12% per year (increasing to 2% per month after a default) plus
payments of real estate taxes and, in the case of the $3.4 million note, “Additional Interest” equal
to a portion of the proceeds from the sale of condominium units. 	It is undisputed that these
amounts are due under the notes, but Haimil simply ignored them in its SJ Motion. 	In addition,
the very piece of evidence that Haimil cited in support of the allegation that the outstanding
principal was approximately $7.2 million as of March 12, 2008 said also that there was outstanding
unpaid accrued interest as of that date in an unspecified amount. 	Haimil also submitted exhibits
(including an opinion by the state court) that refer to allegations that real estate taxes had not been
paid. 	See SJ Motion, Ex. 21.
Haimil therefore has not provided any accounting of the correct amounts due under the
notes. 	Even if all of the Rule 7056 allegations were accepted as true, there is no basis on which
3 The March 12, 2008 letter from Dominion to Haimil’s former counsel stated that the principal amount that Haimil
owed to Dominion was $7,158,000.00, and also noted that Dominion “has accrued the interest for three years.”
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the Court could conclude that the notes have been fully paid.
3. 	The “Paid-off”Notation
Haimil has also pointed to a spreadsheet, apparently prepared by Dominion, in which a line
item across from a reference to the $3.4 million note contains the words “paid off.” 	Dominion has
responded by saying that the spreadsheet computes monies that Dominion borrowed from IDB and
that the “paid off” language means that Dominion had paid off its debt to IDB, not that Haimil had
paid its obligations to Dominion. 	Haimil argues that the notation has a different meaning but the
spreadsheet itself is the only item submitted to the Court by the parties. 	Haimil offered no
testimony that the spreadsheet refers to the repayment of Haimil’s obligations to Dominion. 	At
trial, the parties may argue as to how the notation should be interpreted, and someone who actually
prepared the spreadsheet may be able to testify as to the meaning of the notation. 	The
spreadsheet, however, is not sufficient to entitle Haimil to summary judgment.
4. 	Local Bankruptcy Rule 7056-1
The Court notes that Dominion did not submit a statement in the form required by Local
Bankruptcy Rule 7056-1 – namely, a point by point rebuttal of the allegations that were made in
Haimil’s Rule 7056-1 statement.4 	To some extent, this is a matter of form rather than substance,
4 Local Bankruptcy Rule 7056-1 provides, in relevant part, that
…
(b) Upon any motion for summary judgment pursuant to Bankruptcy Rule 7056, there shall be
annexed to the motion a separate, short, and concise statement, in numbered paragraphs, of the
material facts as to which the moving party contends there is no genuine issue to be tried. Failure to
submit the statement shall constitute grounds for denial of the motion.
(c) Papers opposing a motion for summary judgment shall include a correspondingly numbered
paragraph responding to each numbered paragraph in the statement of the moving party, and if
necessary, additional paragraphs containing a separate, short, and concise statement of additional
material facts as to which it is contended that there is a genuine issue to be tried.
(d) Each numbered paragraph in the statement of material facts required to be served by the moving
party shall be deemed admitted for purposes of the motion unless specifically controverted by a
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as Dominion’s papers make clear which points it disputes, even if Dominion did not comply with
the explicit requirements of Local Bankruptcy Rule 7056-1. 	More importantly, Rule 56 makes
clear that the Court must determine whether the admitted facts that have been offered are sufficient
by themselves to entitle the moving party to summary judgment, even in the absence of a proper
opposition. 	See Holtz v. Rockefeller & Co., Inc., 258 F.3d 62, 74 (2d Cir.2001) (holding that a
“local rule does not absolve the party seeking summary judgment of the burden of showing that it
is entitled to judgment as a matter of law”). 	Even if the Court were to treat the facts in Haimil’s
Rule 7056 statement as admitted because of the lack of a response controverting them, those facts
still would not entitle Haimil to summary judgment for the reasons stated at the Hearing and set
forth herein.
5. 	Unclean Hands
Haimil also contends that there is no genuine issue of fact as to its defense that foreclosure
should be barred based upon an “unclean hands” defense. 	By its very nature, the unclean hands
defense requires consideration of many facts, including not only the conduct of the opposing party
(Dominion) but the motivations for it and the alleged prejudicial impact on the borrower. 	See
Doe v. Deer Mountain Day Camp, Inc., 682 F.Supp.2d 324, 338 (S.D.N.Y. 2010), (citing Nat'l
Distillers & Chem. Corp. v. Seyopp Corp., 17 N.Y.2d 12, 267 N.Y.S.2d 193, 214 N.E.2d 361, 362
(1966)) (“According to New York law, the doctrine of unclean hands requires the defendant to
prove that (1) the plaintiff is guilty of immoral, unconscionable conduct; (2) the conduct was relied
upon by the defendant; and (3) the defendant was injured thereby.”) 	Here, Haimil relies primarily
on an allegation that in the state court, in connection with a summary judgment motion filed in the
correspondingly numbered paragraph in the statement required to be served by the opposing party.
…
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foreclosure action there, Dominion submitted a $1 million dollar note purportedly executed by the
principal of Haimil. 	Haimil filed a motion for contempt arguing that the $1 million note was
forged and seeking sanctions against Dominion. 	Dominion argued that it was not aware that the
note was not valid and withdrew its summary judgment motion. 	The state court determined that
the $1 million note was “inauthentic” but denied the contempt motion, and left for trial the impact
of the submission of the $1 million note. 	Haimil has not offered evidence of any prejudice it
allegedly suffered from this incident or any reliance it made on any assertions regarding the $1
million note, and summary judgment plainly is not warranted.
Haimil also contends that the back-dating of the $4 million note, which was executed in
March 2008 but back-dated to November 15, 2006, entitles Haimil to summary judgment on the
unclean hands defense. 	However, Haimil acknowledges that its representative signed the
back-dated note. 	No legal authorities have been cited as to the significance of the back-dating,
and no evidence has been offered as to the reason the note was back-dated, whose idea it was to
back-date it, and whether Haimil itself knew of the back-dating. 	The Court cannot find that the
mere back-dating of the note entitles Haimil to summary judgment in its favor on the unclean
hands defense.
6. 	The Statute of Limitations Defense
The final two issues raised in the motion relate to the proposed statute of limitations
defense. 	The Court is skeptical as to whether that defense can really be sustained in light of the
pleadings in the case, which seem to preclude it. 	Haimil’s counterclaim alleges that various
payments in 2008 through 2010 were applied against the $3.4 million note; in its reply, Dominion
agreed that the 2010 payment had been so applied. 	See Verified Reply to Counterclaims, dated
May 29, 2013 (SJ Motion, Ex. 5, ¶ 28). 	Both parties acknowledge, therefore, that one or more
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part payments occurred after January 1, 2008, which would have the legal effect of reinstating the
statute of limitations. 	Chase v. Houghton, 41 A.D.3d 1062, 838 N.Y.S.2d 260, 261-62 (3d Dep't
2007) (noting that a part payment tolls the statute of limitations where there is “a payment of a
portion of an admitted debt, made and accepted as such, accompanied by circumstances amounting
to an absolute and unqualified acknowledgment by the debtor of more being due, from which a
promise may be inferred to pay the remainder”).
Nevertheless, the motion to amend the pleadings to assert the statute of limitations defense
was not opposed in the papers that Dominion filed. 	Counsel to Dominion argued at the Hearing
that it would be prejudicial to allow the defense at this late stage, but no actual prejudice was
identified. 	If Dominion’s response is that the limitations period was extended by part payment,
then Dominion is not prejudiced because both sides know what payments were made and when
they were made.
Although the Court is doubtful as to the strength of the statute of limitations defense under
the admitted facts, it will allow the amendment. 	As to Haimil’s request for summary judgment:
there is some authority that summary judgment can be sought contemporaneously with a request
for leave to amend. 	See Block v. First Blood Associates, 988 F.2d 344, 350 (2d Cir. 1993)
(concluding that, absent bad faith or prejudice, a court may consider an affirmative defense raised
for the first time on a summary judgment motion; and affirming District Court, which had
construed summary judgment motion as also a motion to amend the answer under Rule 15(a)) to
add the statute of limitations as an affirmative defense; and at the same time determining that the
action was time barred). 	As noted above, however, Haimil’s own pleadings admit that part
payments were made, which precludes summary judgment on the statute of limitations defense.
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CONCLUSION
Haimil may amend its answer to assert the statute of limitations as an affirmative defense.
Haimil’s motion for summary judgment is denied.
Dated: New York, New York
March 24, 2015
s/Michael E. Wiles
UNITED STATES BANKRUPTCY JUDGE
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