United States v. Levine

Citations: 902 F. Supp. 367; 1995 U.S. Dist. LEXIS 15880; 1995 WL 627946Docket: No. 94 Civ. 0257 (CLB)

Court: District Court, S.D. New York; March 20, 1995; Federal District Court

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The Government filed a motion for summary judgment and a default judgment to enforce a junior mortgage on the residential property owned by defendants Lisa and Jennifer Levine and occupied by Herman Levine. The Court, after reviewing the uncontested facts, determined to grant summary judgment in favor of the non-moving defendants, dismissing the action. The case was initiated on January 18, 1994, by the United States to collect a debt owed to the Small Business Administration (SBA) and to foreclose on property located at 34 Kennedy Terrace, Middletown, New York. A loan of $250,000 was issued to Holiday Syrups, Inc. on April 29, 1977, with a first mortgage on the business premises secured by the SBA. Herman Levine and his deceased wife Linda acted as guarantors for this loan and provided a junior mortgage on their home as collateral, recorded on May 5, 1977. The complaint seeks to foreclose on this mortgage due to default. A notice of pendency was filed on January 20, 1994. The defendants claimed a third affirmative defense citing the ongoing Holiday Syrups litigation relating to the same debt. Holiday Syrups defaulted on the loan in June 1980, leading to the assignment of the mortgage and guaranty to the SBA, which later certified that the unpaid balance owed by Herman Levine was $84,000 as of June 24, 1994. Additionally, an involuntary bankruptcy petition was filed against Holiday Syrups in 1991, and the debtor’s estate was closed in 1987.

On March 16, 1993, the United States initiated the Holiday Syrups action (93 Civ. 1620) to foreclose on a mortgage for the property located at 12-14 Stanton Street, Middletown, New York, formerly owned by the Borrower, known as the 'Holiday Syrups Property.' Defendants included the City of Middletown, the New York State Industrial Commissioner, and the New York State Workers Compensation Board, but the Levines were not parties in this case. At the time of the notice of pendency, record title for the property at 34 Kennedy Terrace was held by defendants Lisa and Jennifer Levine, with Herman Levine occupying it. Their title was encumbered by an initial first mortgage from Inter County Savings Bank and a junior lien from Old Dutch Mustard Co. Inc., another defendant. The case led to a final judgment by Judge Goettel, with the government opting not to include the Levines. The Stanton Street property was sold at a public auction on November 18, 1994, for $45,000, despite an appraisal indicating its value at approximately $100,000. No deficiency judgment was sought as the underlying debt was discharged in bankruptcy, and Herman Levine was not included as a party. The transaction followed standard commercial loan practices in New York, where state foreclosure laws are applicable unless overridden by federal law, as established in United States v. Kimbell Foods, Inc. New York's RPAPL Section 1371 states that failure to seek a deficiency judgment means the proceeds from the sale satisfy the mortgage debt entirely, preventing further claims for deficiency. The sale of the Stanton Street property in the Holiday Syrups action aligns with this statute, and Herman Levine's exclusion from the suit raises issues of his potential liability, as clarified in the case of Sanders v. Palmer.

The New York Court of Appeals decision in Sanders established that when corporate principals guarantee a mortgage loan for their corporation, and a third party provides a separate guaranty secured by a second mortgage on unrelated property, the failure of the mortgage holder to pursue a deficiency judgment from the third guarantor after foreclosure results in the satisfaction of the third guarantor's mortgage. The Court found the case at hand analogous to Sanders, determining that because the Government did not sue Herman Levine for a deficiency judgment as required by the New York Real Property Action and Proceedings Law, it is barred from enforcing the guaranty against the Levines and the Kennedy Terrace property. Consequently, the Court ordered the dismissal of the action, while allowing the notice of pendency to remain until appellate proceedings are concluded.

In a subsequent motion for reconsideration by the United States, the Court acknowledged the Government's reliance on Westnau Land Corp. v. United States as pivotal to its argument but expressed disagreement with the Government's broad interpretation of that case. The Court agreed to grant the reconsideration motion and indicated that further discussion of the arguments would follow. The underlying complaint involves the United States seeking to collect a debt owed to the Small Business Administration (SBA) related to a loan made to Holiday Syrups, Inc. The loan, amounting to $250,000, was partially guaranteed by the SBA and secured by a first mortgage on the business premises, with additional promissory notes and a junior mortgage provided by Herman Levine and his late wife on their property at 34 Kennedy Terrace.

The mortgage attached to the complaint serves as collateral for Holiday Syrups, Inc.'s indebtedness. The complaint seeks to declare Herman Levine and the deceased Linda Levine in default of the mortgage and to foreclose their interests in the property, subordinating all junior liens to the U.S. as the SBA's guarantor of a loan to Holiday Syrups. Holiday Syrups defaulted around June 24, 1980, leading the lender to assign the mortgage on the business premises and the Levines' collateral mortgage to the SBA. The SBA accelerated the debt and demanded payment from both the borrower and the Levines. On March 16, 1993, the U.S. filed a foreclosure action, 93 Civ. 1620, against Holiday Syrups and other parties, excluding the Levines, and the property was sold at a public auction on November 18, 1994, for $45,000. A subsequent court order dismissed the complaint due to the Government's failure to secure a deficiency judgment against the Levines, as required under New York law. The Government contends that it could not comply with the statutory requirements because the statute of limitations for seeking a deficiency judgment had expired in 1986, following a written demand in 1980. However, the defendants argue that the Government's claim to foreclose on the Levine property was still valid under a different statute, which allows for declaring a deficiency, and that the Government failed to initiate necessary proceedings to establish this deficiency.

The Court expresses skepticism regarding the Government's inability to comply with New York's Section 1371(3) with due diligence, as a commercial lender would be expected to do. The issue of whether the statute of limitations has expired concerning the Levines’ guaranties is not properly before the Court, as it should have been addressed in a previous case (United States v. Holiday Syrups). The Government failed to name Herman Levine in the mortgage foreclosure action, which is a requirement for obtaining a deficiency judgment under New York law. Additionally, the defendants have not raised a statute of limitations defense in the current foreclosure action, and the Court found no basis to dismiss the Government's claim based on a time-bar. 

The Government's argument rests on the premise that it is not subject to a statute of limitations in mortgage foreclosure cases, citing Westnau. However, because Congress did not establish a specific statute of limitations for foreclosure actions, the United States, as a sovereign entity, is not restricted by any statute of limitations for this type of action. Under New York law, a mortgage is inseparable from the underlying debt, and while the right to foreclose is distinct from seeking monetary damages on the note, foreclosure rights persist even if an action for debt is time-barred. The Court finds no conflict between federal and state law in this case, as the foreclosure action is not time-barred and does not contradict any federal statute. The procedural nature of New York RPAPL Section 1371 aligns with Supreme Court precedent, which recognizes state statutes that do not undermine federal interests. Previous rulings confirm that failure to include a mortgagor in foreclosure proceedings can preclude recovery of deficiency judgments, reinforcing that state law does not conflict with federal regulations.

The government is obligated to adhere to the notice requirements established by New York's deficiency judgment statute. The Small Business Administration (SBA) must comply with both the procedural and substantive aspects of state law unless explicitly directed otherwise by Congress, which is not the case here. The Court of Appeals previously recognized significant federal interests in nationwide programs but distinguished the SBA's role from that of the Federal Housing Authority (FHA) in terms of applying federal law to state law. The Supreme Court's ruling in United States v. Yazell indicated that the SBA's interest in collecting on disaster loans does not justify overriding Texas state law. The SBA operates similarly to a commercial lender and is subject to state statutory requirements regarding deficiency judgments, as noted in the Fifth Circuit's ruling in United States v. Dismuke.

The purpose of Section 1371 is to prevent mortgagees from double recovery through simultaneous legal and equitable actions after a default. This section merges legal and equitable remedies, allowing a mortgagor to be liable only for the amount not satisfied post-foreclosure sale. Courts must consider the impact of applying federal rules on state law-based commercial relations, as emphasized by the Supreme Court in Kimbell Foods. Exempting the SBA from New York's foreclosure requirements could have detrimental effects on local business practices.

The court granted a motion for reargument but maintained its prior decision. It noted that the action against Linda Levine was dismissed due to her death before service of process, with property interests believed to have transferred to her heirs, Lisa and Jennifer Levine. The court acknowledged concerns about the actual market value of the property and criticized judicial auction sales, which are often viewed as distress sales yielding low prices and attracting a limited pool of buyers. The New York legislature has sought to protect debtors from such practices.