Equitable Estoppel of a Mortgagee’s Claim*

The doctrine of “ equitable estoppel ” was applied in a recent case litigated…

The doctrine of equitable estoppel was applied in a recent case litigated in the Commercial Division of the Kings County Supreme Court. In deciding that a mortgagee was estopped from collecting additional moneys from the mortgagor/cooperative corporation, Justice Carolyn Demarest relied upon the long-standing principle that the courts will not allow a party to “lull” another into inactivity to its detriment. In affirming the Decision and Order of Justice Demarest, the Appellate Division, Second Department found that summary judgment was properly granted on the basis of equitable estoppel.

The case of 335 Second Street Housing Corp. v. Fridal Enterprises, Inc. Money Purchase Pension Plan (Sup. Ct., Kings Co., Index No. 8401/2005) involved an interesting fact pattern. As illustrated in the decision of the judge, the relevant facts of the case (which were not in dispute) were as follows:

335 Second Street Housing Corp. (“335 Second”) is the owner of real property located at 335 Second Street, Brooklyn, New York. 335 Second acquired title to the premises through a conversion to cooperative ownership. At the time that 335 Second acquired title to the premises, the real property had been encumbered by a mortgage, dated April 28, 1989, with an unpaid principal sum of $200,000 held by D&F Capital Co. (“D&F”). On July 26, 1990, 335 Second entered into an extension agreement with D&F, which provided that 335 Second Street was indebted to D&F for the sum of $200,000 with interest from July 26, 1990; however, the extension agreement also modified and extended the time for 335 Second to pay and satisfy the principal indebtedness of $200,000, by making it payable as follows:

$194.45, representing a payment of interest only for the period of July 26, 1990 to July 31, 1990;

$1,166.67, commencing on August 1, 1990, and equal consecutive payments on the same day of each and every month thereafter, until July 31, 1993, with each of the monthly payments to be applied to interest only at the rate of 7% per annum on the unpaid principal balance;

$1,500, commencing on August 1, 1993, with equal consecutive payments on the same day of each and every month thereafter, until July 31, 1995, with each of the monthly payments to be applied to interest only at the rate of 9% per annum;

The entire unpaid principal balance of $200,000 together with accrued interest thereon, if any, shall become due and payable on July 26, 1995, unless the apartment corporation exercises its option to extend the mortgage for an additional five (5) years.

The extension agreement provided that, if 335 Second, after the initial five-year term of the mortgage (from July 26, 1990 to July 31, 1995) elected to exercise its option to extend the mortgage for an additional five years after the due date of the unpaid principal balance, it was required to “ notify the Mortgagee in writing thirty (30) days prior to August 1, 1995. “ It stated that, if 335 Second did so, “ a one (1%) percent fee on the unpaid principal balance ” would “ then be due and payable by the apartment corporation to the mortgage. ” The extension agreement also stated that, if 335 Second exercised this option to extend the mortgage for the additional five-year term, the following terms of payment would then be applicable:

[M]onthly payments shall be $2,333.33, commencing August 1, 1995 and equal payments on the same date of each month thereafter consisting of interest only at the rate of 14% per annum on the unpaid principal balance until July 26, 2000, when the entire unpaid principal balance of $200,000 shall become due and payable. ”

Paragraph 24 of the extension agreement further provided:

After maturity, stated or accelerated, interest shall accrue at the rate of sixteen (16%) percent per annum, but this provision shall not constitute an extension of time for the payment of the balance of principal.

By assignment, also dated July 26, 1990, D&F assigned its interest in the mortgage to Fridal Enterprises, Inc. Money Purchase Pension Plan (“Fridal”).

335 Second duly made the monthly payments of interest-only due under the mortgage, as provided in the extension agreement. When the entire unpaid principal balance of $200,000 became due and payable on the July 26, 1995, maturity date, as provided by the extension agreement, 335 Second did not satisfy the principal balance. 335 Second also did not notify Fridal in writing 30 days prior to August 1, 1995, that it was electing to exercise the option given to it in the extension agreement to extend the mortgage for an additional five-year term. Finally, 335 Second did not pay to Fridal the one (1%) percent extension fee on the unpaid principal balance which would have been due and payable in the event that it elected to exercise such option to extend the term of the mortgage.

Instead, 335 Second simply continued to pay interest on the note at the nine (9%) percent interest rate, which had been the rate in effect pursuant to the terms of the extension agreement prior to the note’s maturity. 335 Second made these interest-only payments in response to regular, monthly bills sent by Fridal, which specifically listed the interest rate of nine (9%) percent per annum and the monthly payment due as $1,500. These monthly bills directed 335 Second to remit this amount of payment together with a copy of the relevant bill within five days of the due date, which was the first of the following month.

By letter dated December 7, 1995, Fridal advised 335 Second that the principal indebtedness of $200,000 on the property had matured on August 1, 1995. Fridal stated, in such letter, that it was “ willing to discuss an extension and modification of payments on this loan. ” It further stated that 335 Second shall call it immediately to set up an appointment date. No response was made by 335 Second to this letter and no new extension or modification of payments on the loan was discussed or negotiated between the parties. Fridal did not declare a default at that time; rather, it continued to send monthly bills to 335 Second, as it had previously done, which directed that it remit its monthly payment of $1,500, computed at the rate of nine (9%) percent per annum.

335 Second also did not pay the unpaid principal balance of $200,000 on July 26, 2000, and Fridal did not declare a default at that time. 335 Second merely continued to duly pay the bills sent to it by Fridal, which billed it at the nine (9%) percent per annum interest rate. This pattern of payments continued for almost ten years (from July 26, 1995 to December 2004). In December 2004, 335 Second contacted Fridal regarding the provision of a pay-off statement pertaining to the extension agreement because it was in the process of refinancing the real property with another lender to do renovations.

On February 14, 2005, Fridal, in response, informed 335 Second that, aside from payment of the principal balance of $200,000, 335 Second was indebted to Fridal for additional moneys, namely: (1) the difference in interest between 14% per annum and 9% per annum for the period of August 1, 1995 until July 26, 2000; (2) the difference in interest between 16% per annum and 9% per annum for the period of August 1, 2000 until pay-off of the principal balance; and (3) the 1% extension fee. Fridal contended that these sums were due pursuant to the terms of the extension agreement. Specifically, Fridal claimed that the terms of the extension agreement, which provided for the higher 14% interest rate and the 1% fee in the event that 335 Second had extended the loan beyond the July 26, 1995 maturity date, had automatically become operative due to 335 Second’s non-payment of the principal balance on the July 26, 1995 maturity date. It further claimed that, after July 26, 2000, the default rate of 16% per annum had become operative. Fridal demanded payment of this entire sum.

Consequently, 335 Second brought an action against Fridal, seeking a declaratory judgment that Fridal’s claims for these additional moneys had been waived, and that Fridal should be directed to tender a pay-off statement solely for the principal balance due and any accrued interest from the time of commencement of the action until satisfaction of the mortgage at the rate of 9% per annum. Fridal counterclaimed for a judgment against 335 Second for all of the alleged back interest and fees due, which it claimed it was owed.

” …well settled that the doctrine of equitable estoppel may be invoked… “

In reaching her decision, Justice Demarest indicated that it is well settled that the doctrine of equitable estoppel may be invoked where a lender’s actions have lulled a borrower into a false sense of security or where it would be inequitable to enforce certain terms of an agreement. See, Karas v. Wasserman, 91 AD2d 812 (1982); Marine Midland Bank-Western v. Center of Williamsville, 48 AD2d 764 (1975); More Realty Corp. v. Mootchnick, 232 AD 705 (1931); Triple Cities Construction Co. v. Maryland Casualty Co., 4 NY2d 443 (1958) (“ An estoppel …. rests upon the word or deed of one party upon which another rightfully relies and, in so relying, changes [its] position to [its] injury. ” quoting Metropolitan Life Insurance Co. v. Childs Co., 230 NY 285 (1921)).

” …the court laid out the essential elements of an equitable estoppel claim… “

In the N.Y. State Guernsey Br. Co-op v. Noyes, 260 AD 240 (3d Dept. 1940), modified on other grounds, 284 NY 197 (1940), the court laid out the essential elements of an equitable estoppel claim, as follows:

  1. As related to the party to be charged: (a) conduct which amounts to a false representation or concealment of material facts; (b) intention, or at least expectation, that such conduct shall be acted upon by the other party; and (c) knowledge, actual or constructive, of the real facts; and
  2. As related to the party claiming the estoppel: (a) lack of knowledge; (b) reliance upon the conduct of the party estopped; and (c) action based thereon of such a character as to change his position prejudicially.

In this case, Fridal did not bill 335 Second for the higher 14% per annum interest payments or the 1% extension fee which it now claims are due, nor did it otherwise make any demand for such moneys. Rather, Fridal has admitted that since 1993 up until the present time (long past the 1995 due date), it had regularly billed 335 Second for interest payments of the subject mortgage in the amount of $1,500. As noted above, the bills indicate specifically thereon that the $1,500 payment is based upon “Interest Rate: 9.00%” Such conduct by Fridal indicates that Fridal was continuing to operate under the pre-maturity terms of the extension agreement, which required 9% per annum interest payments. The letter from Fridal, dated December 7, 1995, further evidenced its intent that the higher 14% interest rate was not automatically operative or in effect since it stated that it was “willing to discuss an extension and modification of payments on this loan.” Fridal’s conduct, by continuing to render bills at 9% per annum interest, and accepting payments at this rate following its sending of this letter on December 7, 1995, demonstrated that the higher 14% interest rate was never triggered and that it would continue to accept the amount of the payments made by 335 Second in full satisfaction of the interest due.

Furthermore, as the judge noted, Fridal never affirmatively declared a default by 335 Second on July 26, 2000, or indicate any intention to impose the 16% per annum interest rate after that date. Instead, Fridal simply continued to bill 335 Second at the 9% per annum interest rate. By its failure to demand payment of the full principal indebtedness or declare a default following July 26, 2000, Fridal indicated that it was not seeking to impose the 16% per annum rate of interest.

“ Waiver is the intentional relinquishment of a known right, and therefore may be inferred from conduct or a failure to act that evinces an intent not to claim the purported advantage. ” Fundamental Portfolio Advisors v. Tocqueville Asset Mgt. LP,22 AD3d 204 (2005), quoting Hadden v. Consolidated Edison Co. of NY, 45 NY2d 466 (1978). Although Fridal had knowledge of the actual terms of the extension agreement, it customarily never complained of the previous pattern of payments in its continued dealings with 335 Second. It was only when 335 Second sought to refinance that Fridal made this belated claim to these alleged additional moneys due over and above the interest payments which it had previously accepted as satisfactory for nearly ten years without complaint. Fridal’s position of seeking these back payments was deemed inconsistent with its prior conduct.

In relying upon the reasoning of More Realty Corp. v. Mootchnick, 232 AD 705 (1931), Justice Demarest determined that Fridal should have reasonably expected that its acceptance of regular monthly payments at nine percent would induce 335 Second to be lulled into a false sense of security and to not seek to renegotiate the loan upon better terms. By Fridal’s conduct, in at no time declaring a default, failing to demand payment of the 1% extension fee, affirmatively rendering monthly bills at 9% interest, and accepting such payments from 335 Second, it conveyed the impression that Fridal was not imposing the higher 14% interest rate or enforcing its right to obtain interest at the default rate of 16%.

In this case, 335 Second was able to ascertain the terms of the extension agreement but lacked the knowledge that Fridal would change its position, disclaiming the terms that 335 Second had every reason to believe were operative, and demand additional back interest and moneys purportedly due despite Fridal’s failure to declare a default or to otherwise make a demand for these moneys. 335 Second justifiably relied upon the bills sent by Fridal, which set forth the 9% per annum interest rate and the monthly $1,500 amount due, and upon Fridal’s acquiescence in 335 Second’s payment of these sums. These bills induced 335 Second to reasonably believe that Fridal had tacitly accepted the payments in full satisfaction of all interest due. 335 Second changed its position to its prejudice by virtue of Fridal’s conduct in that it did not seek to renegotiate the rate or interest or to satisfy or refinance the mortgage debt for the past nearly 10 years during which time interest rates had been in decline.

Accordingly, under these circumstances, the court determined that it would be unconscionable to require 335 Second to now pay the additional amounts sought by Fridal, since Fridal induced 335 Second to believe that these back payments would not be imposed and such belief was reasonable and acted upon by 335 Second to its prejudice, and that Fridal should be equitably estopped from seeking such moneys. Moreover, it was an undisputed fact that the terms of the extension agreement established that only if 335 Second elected to extend the mortgage beyond July 26, 1995, and exercised its option by giving notice to Fridal in writing within thirty days prior to August 1, 1995, would the 14% rate of interest apply. Since 335 Second did not elect to exercise its option under the terms of the extension agreement, the higher 14% interest rate and the 1% fee were never payable to Fridal. The letter of Fridal, dated December 7, 1995, implicitly acknowledged this fact by offering “ to discuss an extension and modification of payments on this loan. ”

Although 335 Second never responded to the December 7th offer directly, Fridal continued to bill at 9%, thus indicating its intent to accept such sum as a modification of the terms of the extension agreement. In making such payments, as demanded by Fridal in writing, 335 Second accepted Fridal’s offer and a new contract was thereby created. The extension agreement provides: “ This agreement may not be changed or terminated orally; ” however, the modification here was not oral but was reflected in the written billing demands of Fridal. The course of conduct of the parties, Fridal’s failure to declare a default, and 335 Second’s payment of the 9% interest demanded and accepted by Fridal over a period of nearly ten years, corroborates the amended terms of the agreement. See generally, Rose v. Spa Realty Assoc., 42 NY2d 338.

The judge noted that the 9% interest rate in effect when the mortgage became due on July 26, 1995, was acceptable and beneficial to both parties. The higher rate provided in the extension agreement might have been prospectively reasonable on July 26, 1990, but were not longer advantageous to 335 Second in 1995. If Fridal had sought to enforce the terms of the agreement, 335 Second would no doubt have sought to refinance the mortgage much sooner. By implicitly reforming the terms of the mortgage, by continuing to demand and accept the 9% interest after the maturity date, Fridal induced 335 Second to leave its mortgage in place. There was no evidence presented of “ mutual mistake ” or reliance on a billing mistake continuing for nearly ten years, but rather, the evidence suggested a conscious decision on both sides to maintain the status quo for each party’s own benefit.

In granting summary judgment in favor of 335 Second as against Fridal, Justice Demarest directed Fridal to provide a pay-off statement, without including all of the additional moneys. The judge equitably estopped Fridal from collecting (1) the difference in interest between 14% per annum and 9% per annum for the period of August 1, 1995, until August 26, 2000; (2) the difference in interest between 16% per annum and 9% per annum for the period of August 1, 2000, until pay-off of the principal balance; and (3) the 1% extension fee.

” …the issue of equitable estoppel was properly before the court… “

The Appellate Division, Second Department rendered a Decision and Order on January 9, 2007 (2007 NY Slip Opinion 130), in which the court affirmed the Order of Justice Demarest. The Second Department held that:

“ Contrary to the defendant’s contentions, the issue of equitable estoppel was properly before the court on these motions. Moreover, the Supreme Court correctly determined that the defendant engaged in a course of conduct over a period in excess of nine years whereby it affirmatively billed the plaintiff at an interest rate lower than that authorized by the parties’ agreement, and acquiesced in the plaintiff’s payments at that rate without complaint, objection, or the declaration of a default. Moreover, the evidence submitted on the motions established that the defendant’s conduct induced the plaintiff’s reasonable belief that the higher rate would not be imposed, and that the plaintiff relied upon that conduct to its detriment in refraining from seeking a more advantageous financing agreement. Accordingly, the Supreme Court properly granted summary judgment to the plaintiff on the basis of equitable estoppel (see generally Nassau Trust Co.v. Montrose Concrete Products Corp., 56 NY2d 175; Triple Cities Construction Co. v. Maryland Casualty Co., 4 NY2d 443; First Union National Bank v. Tecklenburg, 2 AD3d 575; Karas v. Wasserman, 91 AD2d 812; More Realty Corp. v. Mootchnick, 232 AD 705).

— by Richard A. Klass, Esq.
Your Court Street Lawyer
Copyr. 2008

*This article was also printed in the OneOnOne Newsletter, Summer/Fall 2007, Vol. 28, No. 1, published by the New York State Bar Association.

Keyphrase: equitable estoppel