New York Court of Appeals: Altshuler Shaham Provident Funds, Ltd. v. GML Tower, LLC

This mortgage foreclosure action arises from a failed redevelopment of the Hotel Syracuse complex in downtown Syracuse, New York. In September 2005, defendants GML Tower LLC, GML Syracuse LLC, and GML Addis LLC purchased property to make up the hotel complex. The entities received a $7 million loan for acquisition of the properties. In 2007, Perfect Provident Fund, Ltd., the predecessor of plaintiff Altshuler Shaham Provident Funds, Ltd. (“Altshuler”) entered into a loan agreement with GML Tower and Ameris Holdings, Inc. (“Ameris”), whereby Altshuler agreed to lend GML Tower and Ameris $10 million, divided into tranches of $5.5 and $4.5 million. After the first tranche timely closed, the lender assigned a promissory note and mortgage to Altshuler, which was recorded on May 3, 2007 (“2007 mortgage”). The second tranche failed to close in accordance with a Memorandum of Understanding between the parties.

In March 2008, GML Tower and Ameris entered into “Amendment No. 1” (“2008 amendment”) of the 2007 loan agreement with Altshuler, which changed the improvements to be built and the terms and conditions of the release of the remaining funds. On the same date, GML Tower and GML Addis entered into an agreement (“2008 mortgage”) with Altshuler. In December 2008, Altshuler commenced this foreclosure action against Ameris, GML Tower, GML Addis, and other defendants Hayner Hoyt Corporation (“Hayner”), Syracuse Merit Electric (“Merit”), and the Pike Company, Inc. (“Pike”). Hayner, Merit, and Pike filed notices of mechanic’s liens. Altshuler sought foreclosure on the tower and Addis buildings, as well as recoupment of the $10 million loan and first priority to the proceeds of the foreclosure sales.

In this action, Hayner, Merit, and Pike cross-moved for summary judgment, seeking an order that their liens were superior to the 2008 mortgage that Altshuler sought to foreclose. In May 2010, the supreme court determined the 2007 loan agreement was indeed a building loan contract, which ensured that Lien Law 22 applied to this case. The judge concluded that the entire $10 million mortgage was subordinate to the subsequently filed mechanic’s liens and granted the cross motions.

Altshuler appealed and in April 2011, the appellate division affirmed the lower court’s decision. In July 2011, the same panel denied Altshuler’s motion for leave to appeal to the Court of Appeals. In October 2011, the Supreme Court of Onondaga County stayed the foreclosure sale of the tower building. However, in March 2012, the supreme court vacated the stay of the enforcement.
A building loan contract must be filed in the clerk’s office of the county where land subject to the contract is located per section 22 of the Lien Law. Failure to comply with the requirements changes the ordinary priority of liens, with a properly filed mechanic’s lien taking priority over the interests of the parties to the contract. Thus, section 22 subjects a lender’s interest to the subordination penalty. Here, Altshuler did not file the agreement before recording the mortgage, and the 2007 mortgage was made pursuant to the unfiled agreement. Additionally, the 2008 amendment should have been filed because it was a compilation of edits of the 2007 loan agreement.

Lastly, the Court considered whether Altshuler was entitled to priority with respect to the $5.5 million of the loan proceeds used to refinance the existing mortgage. The 2007 loan agreement ($5.5 million to pay off the mortgage) closed before any monies were advanced for construction, and the 2007 mortgage in this amount was recorded before any contractor began work on the project. Thus, the $5.5 million of the loan proceeds were not subject to the subordination penalty.

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21 N.Y.3d 352, N.Y. Slip Op. 04273 (2013)

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