Court Opinion

ID: 5810995
Source: CourtListenerOpinion
Date Created: 2022-01-12 18:46:50.944554+00
Date Added: 2024-06-11T08:42:51.392897
License: Public Domain

Greenblott, J. (dissenting).
We respectfully dissent.
In our opinion, the mortgagee is subject to the penalties of section 22 of the Lien Law if the borrower’s verified statement is known by the mortgagee to be false at the time it is filed.
In HNC Realty Co. v Golan Hgts. Developers (79 Misc 2d 696) the court adopted this view. In the case at bar, the majority has declined to follow the reasoning of HNC Realty, taking the view that nothing in the statute justifies a disparity of treatment depending on the lender’s knowledge or lack of knowledge as to the falsity of the statement, and, therefore, an interpretation should not be adopted which would discourage lenders from incurring the risks inherent in building loans.
It is our view that when the purpose of section 22 is considered together with other pertinent provisions of the Lien Law, a disparity of treatment based on the lender’s degree of knowledge is indeed justified. Section 22, as we have seen, has as its purpose the notification of materialmen, laborers and other lienors as to the amount of the fund which is being made available to purchase their services, and under subdivision (3) of section 13 of the Lien Law, such a fund is required to be held in trust for their benefit. In reliance upon the knowledge that such a trust fund exists, potential lienors are relieved of having to look to other forms of security. The very fact that the proceeds of a loan are deemed to be held in trust is ample reason to reject Special Term’s theory that appellants were not prejudiced by the payment of a debt the existence of which was a matter of public record, for there is nothing to show that the prior mortgage was a "cost of improvement” entitled to be paid out of the trust fund. If that prior mortgage was not entitled to be satisfied out of the trust fund, appellants clearly were prejudiced by being led to be*283lieve that the amount which would be held in trust for payment of their claims was greater by $63,000 than the amount actually available.
This is not to say that the lender is under any duty to see that the trust fund is properly applied, and subdivision (3) of section 13 is clear in its declaration that no such obligation exists. Thus, had the respondent actually turned over to the defendant borrowers an amount equal to that set forth in the borrower’s statement as the net sum available, section 22 would not operate to subordinate respondent’s mortgage in the event of an impermissible diversion or misappropriation of those funds at a subsequent time.
This, however, is not the basis of the appellants’ claim. Rather, it is alleged that the bank had knowledge that the net proceeds of the loan did not equal the "net sum available” as set forth in the borrower’s statement. If this allegation could be proven, by a showing as to the distribution of proceeds at the closing of the loan or otherwise, we see no reason for excusing respondent from the consequences of being party to a filing which failed to meet the requirements of section 22. Such a result will not, as Special Term feared, operate to make mortgage lenders guarantors of the correctness of all expense statements by the borrower. It merely will require a lender, who is in as good position as a borrower to know the net sum advanced, to see to it that that sum is in fact turned over to the borrower in accordance with the filed statement. What happens thereafter is not the lender’s responsibility, but the truth of the statement at the time it is died is a matter for which the lender is capable of being, and therefore should be, held responsible.
Since the court at Special Term denied appellants’ motion on the merits of the proposed defense, it did not reach the question of whether appellants had shown grounds for relieving their default under CPLR 5015. While appellants’ default here is not of the ordinary kind, since they did appear and file waivers, it is our view that their default in answering respondent’s complaint, on the unusual facts of this case, is within the intended meaning of a default leading to an adverse judgment under CPLR 5015. While respondent contends that there was no misrepresentation justifying vacatur of the judgment since respondent’s complaint contained a copy of the verified borrower’s statement, it is the alleged falsity of that statement which appellants contend led them to conclude that *284no defense to the foreclosure action existed. At the very least, it is our view that the default was excusable, and considering the dispatch with which appellants moved to vacate it, we conclude that it would be an abuse of discretion to deny the relief requested.
We would grant the motion to vacate the judgment, and if, upon service of appellants’ answers it appears that there are questions of fact as to respondent’s knowledge of the falsity of the verified borrower’s statement under section 22 of the Lien Law or as to whether the $63,000 mortgage alleged to have been paid represented a cost of improvement, a trial should be had.
Sweeney, Kane and Main, JJ., concur in Per Curiam opinion; Koreman, P. J., and Greenblott, J., dissent and vote to reverse in an opinion by Greenblott, J.
Orders affirmed, with costs.