author: Read, J. Graffeo, J. (concurring in part and dissenting in part).

text:
    [995 NE2d 110, 972 NYS2d 148]
    Altshuler Shaham Provident Funds, Ltd., Appellant, v GML Tower, LLC, et al., Defendants, The Pike Company, Inc., et al., Respondents.
    Argued May 2, 2013;
    decided June 11, 2013

      POINTS OF COUNSEL

      D’Agostino, Levine, Landesman & Lederman, LLP, New York City (Bruce H. Lederman, Eric R. Garcia and Christopher M. Tarnok of counsel), and Hancock & Estabrook, LLP, Syracuse (John G. Powers of counsel), for appellant.
    I. The 2008 consolidated mortgage was recorded pursuant to the 2008 amended commitment and not pursuant to the 2007 commitment. II. The 2008 consolidated mortgage is not a building loan mortgage under Lien Law § 22 because it was not made pursuant to a building loan contract providing for future advances and expressly requiring use of mortgage proceeds for improvements to real property. (Alden State Bank v Sunrise Bldrs., Inc., 48 AD3d 1162; Pawling Sav. Bank v Hunt Props., 225 AD2d 678; Juszak v Lily & Don Holding Corp., 224 AD2d 588; Finest Invs. v Security Trust Co. of Rochester, 96 AD2d 227; Weaver Hardware Co. v Solomovitz, 235 NY 321.) III. The public policy of enabling contractors to learn what sums would be available from a mortgage does not require filing an expired and unenforceable agreement. (Rosenblum v Tilden Improvement Co., 136 App Div 743.) IV The subsequently filed mechanic’s liens should be subordinate to the original $5,500,000 acquisition refinancing if Lien Law § 22 applies. (Yankee Bank for Fin. & Sav., FSB v Task Assoc., Inc., 731 F Supp 64; HNC Realty Co. v Golan Hgts. Devs., 79 Misc 2d 696.) V Issues of law presented on the face of the record may be raised on appeal whether or not specifically raised below. (Telaro v Telaro, 25 NY2d 433; Persky v Bank of Am. N.A., 261 NY 212.) VI. Defendants could not be misled by filed documents because there was a $5,500,000 mortgage of record when they commenced work, and when the 2008 consolidated mortgage of $10,000,000 was filed, it was fully funded. (Dearstine v Carpenter, 106 Misc 102; Sackman-Gilliland Corp. v Lupo, 55 AD2d 1008.) VII. Claims of priority over the interim unsecured loans are moot because the real property sold at auction for less than the acquistion mortgage and/or lump sum financing at closing.

      Hahn, Loeser & Parks, LLP (Timothy M. Bittel, of the Ohio bar, admitted pro hac vice, of counsel), and Gilberti Stinziano Heintz & Smith, P.C., Syracuse (Kevin Roe and John L. Stinziano of counsel), for The Hayner Hoyt Corporation, respondent.
    I. Appellant is barred by judicial estoppel. (Riverside Syndicate, Inc. v Munroe, 10 NY3d 18; Moore v County of Clinton, 219 AD2d 131; Secured Equities Invs. v McFarland, 300 AD2d 1137; Kimco of N.Y. v Devon, 163 AD2d 573.) II. Because appellant failed to raise the argument that the original loan agreement was either “preliminary,” “expired” or “unenforceable” in the lower court, this Court should not consider such argument on appeal. (Quain v Buzzetta Constr. Corp., 69 NY2d 376; ICS/ Executone Telecom v Performance Parts Warehouse, 171 AD2d 1066; Catamount Enters. v Town of Lyons Assessors, 244 AD2d 913; Arvantides v Arvantides, 106 AD2d 853; Enderby v Keppler, 184 AD2d 1058; Matter of Van Wormer v Leversee, 87 AD2d 942; Rentways, Inc. v O’Neill Milk & Cream Co., 308 NY 342; Lindlots Realty Corp. v County of Suffolk, 278 NY 45.) III. The three loan agreements are unfiled building loan contracts. (HNC Realty Co. v Bay View Towers Apts., 64 AD2d 417; Oriskany Falls Fuel v Finger Lakes Gas Co., 186 AD2d 1021; Olson v Kehoe Component Sales, 242 AD2d 902; Fishler v Fishler, 2 AD3d 487; 805 Third Ave. Co. v M.W. Realty Assoc., 58 NY2d 447; Nichols v Nichols, 306 NY 490; Slatt v Slatt, 64 NY2d 966; Havel v Kelsey-Hayes Co., 83 AD2d 380; Allright N.Y. Parking v Shumway, 94 AD2d 962.) IV Failure to file the original loan agreement is the first violation of Lien Law § 22. (Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243.) V Failure to file the memorandum of understanding dated May 1, 2007 is a second violation of Lien Law § 22. (Security Natl. Bank v Village Mall at Hillcrest, 85 Misc 2d 771.) VI. Failure to file amendment No. 1 dated March 4, 2008 is a third violation of Lien Law § 22. (Security Natl. Bank v Village Mall at Hillcrest, 85 Misc 2d 771.) VII. The failure of appellant Altshuler Shaham Provident Funds, Ltd. to file the three loan agreements makes The Hayner Hoyt Corporation mechanic’s lien superior to any mortgage claim of appellant Altshuler. (McDermott v Lawyers’ Mtge. Co., 232 NY 336; Dearstine v Carpenter, 106 Misc 102; Sackman-Gilliland Corp. v Lupo, 55 AD2d 1008; Rosenblum v Tilden Improvement

      Co., 136 App Div 743; Pennsylvania Steel Co. v Title Guar. & Trust Co., 50 Misc 51, 120 App Div 879, 193 NY 37; HNC Realty Co. v Bay View Towers Apts., 64 AD2d 417.)

      Pappas, Cox, Kimpel, Dodd & Levine, P.C., Syracuse (Thomas P. Givas of counsel), for L.A. Painting, Inc., respondent.
    I. The March 29, 2007 agreement was a building loan contract. (Matter of Cohen, 209 App Div 415; Howard Sav. Bank v Lefcon Partnership, 209 AD2d 473; Alden State Bank v Sunrise Bldrs., Inc., 48 AD3d 1162; Pawling Sav. Bank v Hunt Props., 225 AD2d 678; Finest Invs. v Security Trust Co. of Rochester, 96 AD2d 227; Amsterdam Sav. Bank v Terra Domus Corp., 97 AD2d 41; Security Natl. Bank v Village Mall at Hillcrest, 85 Misc 2d 771.) II. Plaintiffs failure to file the loan agreement requires that its entire interest be subordinated.

      Byrne, Costello & Pickard, P.C., Syracuse (Jordan R. Pavlus and Terry R. Pickard of counsel), for TAG Mechanical Systems, Inc. and others, respondents.
    I. Plaintiffs new arguments need not be considered. (Saratoga County Chamber of Commerce v Pataki, 100 NY2d 801, 540 US 1017.) II. Plaintiffs contradictory arguments are precluded by the doctrine of judicial estoppel. (Riverside Syndicate, Inc. v Munroe, 10 NY3d 18; North Fork Bank v Cohen & Krassner, 44 AD3d 375; Kimco of N.Y. v Devon, 163 AD2d 573; Moore v County of Clinton, 219 AD2d 131; Secured Equities Invs. v McFarland, 300 AD2d 1137.) III. Plaintiff is precluded from making arguments for the first time on appeal. (Bingham v New York City Tr. Auth., 99 NY2d 355.) IV. The rarely invoked exception for new points of law does not apply. (Misicki v Caradonna, 12 NY3d 511; Matter of State of New York v Avco Fin. Serv. of N.Y., 50 NY2d 383; Morgan v State of New York, 90 NY2d 471; Bingham v New York City Tr. Auth., 99 NY2d 355; Atlantic Bank of N.Y. v Forrest House Holding Co., 234 AD2d 491; HNC Realty Co. v Golan Hgts. Devs., 79 Misc 2d 696; Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243; Matter of Gregory v Board of Appeals of Town of Cambria, 57 NY2d 865; County of Nassau v Cuomo, 69 NY2d 737; Gramercy Equities Corp. v Dumont, 72 NY2d 560.) V Plaintiff entered into a series of unique transactions which also failed to comply with Lien Law § 13 and it concedes this point on appeal. (Monroe Sav. Bank v First Natl. Bank of Waterloo, 50 AD2d 314; Quain v Buzzetta Constr. Corp., 69 NY2d 376.)

      Phillips Lytle LLP, Rochester (Mark J. Moretti of counsel), for The Pike Company, Inc., respondent.

      Stewart L. Weisman, Manlius, for Pyramid Roofing & Sheet Metal Co., Inc., respondent.
   OPINION OF THE COURT

Read, J.

This mortgage foreclosure action arises from a failed redevelopment of the Hotel Syracuse complex in downtown Syracuse, New York. The complex consists of several properties interconnected by pedestrian bridges: the hotel, built in 1924 and closed in 2004, and its separate garage (the hotel property); a 15-story tower constructed in the early 1980s as an addition to the hotel (the tower building); and a building formerly housing a major department store, vacant since the early 1990s (the Addis building). The lender for the redevelopment and numerous mechanic’s lienors dispute the priority of their respective claims to the foreclosure sale proceeds from the auction of the tower building, a matter governed by Lien Law § 22.

I.

In September 2005, defendant GML Tower, LLC (GML Tower) purchased the tower building for $7 million, and GML Syracuse LLC (GML Syracuse) and GML Addis LLC (GML Addis) bought the other two parcels making up the hotel complex for an additional $2.75 million. The predecessor of a now-defunct Illinois-based bank loaned the GML entities $7 million for acquisition of these properties, as evidenced by a promissory note and secured by the purchase-money mortgage in that amount, both dated September 7, 2005. The mortgage, recorded in the Onondaga County Clerk’s office on September 8, 2005, encumbered all three parcels.

On March 29, 2007, Perfect Provident Fund Ltd., the predecessor of plaintiff Altshuler Shaham Provident Funds, Ltd. (collectively, Altshuler) entered into a “Loan Agreement” (the 2007 loan agreement or the agreement) with GML Tower and its parent company, Ameris Holdings, Inc. (Ameris), whereby Altshuler agreed to loan them $10 million, bifurcated into tranches of $5.5 and $4.5 million. The entire principal amount of the loan was due and payable, with accrued interest at 12% per annum, on March 29, 2010. To secure payment of the amounts owing to Altshuler under the agreement, GML Tower and Ameris undertook to grant Altshuler a “first ranking senior [l]ien, mortgage, pledge, charge and security interest” (which the agreement referred to collectively as the security interest) in, among other collateral, the property and improvements made thereon.

The loan proceeds were to be deposited in a trust account as of the date of the agreement’s execution and delivery (i.e., Mar. 29, 2007), and released by the trustee on the closing date, April 30, 2007, “for immediate repayment” to the Illinois-based bank of the outstanding principal amount of the original $7 million dollar acquisition financing (the $5.5 million tranche); and for deposit into another dedicated bank account (the restricted account) to be “held . . . and disbursed, used and applied solely to finance” improvements of the tower building, based upon constmction progress as determined by an inspector appointed by Altshuler (the $4.5 million tranche). The 2007 loan agreement seems to have contemplated redevelopment of the tower building into residential condominiums and commercial space.

When the transaction did not close on April 30, 2007, Altshuler entered into a “Memorandum of Understanding” (the MOU) with GML Tower and Ameris “[i]n connection with” the agreement. The MOU, dated May 1, 2007, set closing dates for the $5.5 million and $4.5 million tranches of May 1 and May 15, 2007, respectively. The first of the two tranches timely closed, resulting in transfer of $5.5 million from the trust account to the Illinois-based bank on May 2, 2007. By an “Assignment of Note and Mortgage,” executed April 19, 2007, the bank assigned the September 7, 2005 promissory note and mortgage to Altshuler. Altshuler recorded this instrument in the Onondaga County Clerk’s office on May 3, 2007, along with a “Mortgage Extension and Modification Agreement,” dated April 30, 2007, which established $5.5 million as the maximum principal indebtedness secured by the mortgage covering the hotel complex (the 2007 mortgage).

The parties failed to close on the $4.5 million tranche in accordance with the MOU. Instead, on six separate occasions from May 24, 2007 though February 21, 2008, the trustee released monies totaling $2.5 million from the trust account to GML Tower, pursuant to the parties’ joint instructions and advance letters. These disbursements were personally guaranteed by Ameris’s principal.

Then on March 4, 2008, GML Tower and Ameris entered into “Amendment No. 1” (the 2008 amendment or the amendment) of the 2007 loan agreement with Altshuler. The 2008 amendment changed the improvements to be built and the terms and conditions of the release to GML Tower and Ameris of the remaining funds held in the trust account (defined as the remaining loan proceeds in the principal sum of $2 million plus accrued interest and less certain outstanding fees and expenses); and provided for the delivery of additional collateral to Altshuler as security for the $10 million loan. To these ends, the 2008 amendment called for construction of residential and commercial rental units in the tower building rather than condominiums; added the Addis building as collateral; and eliminated the restricted account, providing instead for the trustee to release the remaining funds to GML Tower on March 6, 2008, the new closing date, as an unrestricted lump sum. With the disbursement of these funds, the existing promissory note was canceled and replaced and restated by a replacement note (the 2008 note), the guaranties covering the $2.5 million were rescinded, and Ameris’s principal gave a new personal guaranty in the principal sum of $250,000. Additionally, the lien of the mortgage was apparently released with respect to the hotel property owned by GML Syracuse.

Concomitantly, GML Tower and GML Addis entered into a “Mortgage Increase, Modification, and Spreader Agreement” (the 2008 mortgage) with Altshuler on March 4, 2008. The 2008 mortgage extended the reach of the 2007 mortgage to cover the Addis building in addition to the tower building, and increased the principal amount secured from $5.5 to $10 million. The 2008 mortgage was recorded in the Onondaga County Clerk’s office on March 7, 2008. To provide Altshuler with additional collateral, GML Tower and GML Addis also executed an “Assignment of Leases and Rents” with respect to the tower and Addis buildings, dated March 4, 2008 and recorded in the Onondaga County Clerk’s office on March 7, 2008 (the 2008 assignment).

On December 4, 2008, Altshuler commenced this foreclosure action against Ameris, GML Tower and GML Addis, and other defendants, including The Hayner Hoyt Corporation (Hayner), Syracuse Merit Electric (Merit) and the Pike Company, Inc. (Pike) (collectively, the mechanic’s lienors). Hayner, Merit and Pike began work on the tower building on July 16, 2007, January 20, 2008 and September 4, 2007, respectively; and filed notices of mechanic’s liens on October 31, 2008, December 3, 2008, and September 18, 2009, respectively. Altshuler alleged that GML Tower and Ameris were in default under the terms of the 2007 loan agreement, as modified by the 2008 amendment, and the 2008 note, and that GML Tower and GML Addis were in default under the terms of the 2008 mortgage and the 2008 assignment because mechanic’s liens totaling more than $3,755 million had been filed against the tower building, and because they failed to pay real property taxes on the tower and Addis buildings.

Altshuler sought foreclosure of both buildings and recoupment of the full amount of its $10 million loan, together with interest and late charges, and first priority to the proceeds of the foreclosure sales of the two properties. The mechanic’s lienors, for their part, moved or cross-moved for summary judgment, seeking an order that their liens were superior to the 2008 mortgage that Altshuler sought to foreclose. The mechanic’s lienors also contested the priority of liens as amongst themselves.

In a decision dated May 17, 2010, Supreme Court observed that the parties acknowledged that Lien Law § 22 subordinates a building loan mortgage made pursuant to an unfiled building loan contract to subsequently filed mechanic’s liens, but disputed whether the 2007 loan agreement was a building loan contract (see 28 Misc 3d 475, 478 [Sup Ct, Onondaga County 2010]). The judge ultimately concluded that it was: the loan agreement was made between a lender and an owner of real property; GML Tower and Ameris made an express promise to construct improvements to the property; Altshuler agreed to make periodic advances of $4.5 million to fund these improvements; Altshuler was to be informed of construction progress; and the $10 million loan was to be secured by a mortgage on real property, and “even label[ed] itself a ‘construction loan transaction[ ]’ ” (id. at 479-480).

The judge additionally rejected Altshuler’s alternative argument that it was at least entitled to priority with respect to the $5.5 million used to refinance the tower building’s acquisition. She concluded that the entire $10 million mortgage was subordinate to the subsequently filed mechanic’s liens, relying on Atlantic Bank of N.Y. v Forrest House Holding Co. (234 AD2d 491, 492 [2d Dept 1996]), and declining to follow Yankee Bank for Fin. & Sav., FSB v Task Assoc., Inc. (731 F Supp 64, 71 n 2 [ND NY 1990]).

Accordingly, Supreme Court granted Hayner’s motion and Merit’s and Pike’s cross motions to the extent they argued their mechanic’s liens were superior to Altshuler’s mortgage. The judge further agreed with Merit that its lien was superior to Hayner’s under Lien Law § 56 “because it was a subcontractor to [Hayner] as general contractor” (id. at 482); and turned down Pike’s argument that “its lien [was] superior to all others pursuant to section 13 [of the Lien Law] because it performed labor” (id.). Altshuler appealed Supreme Court’s ensuing order, entered May 20, 2010.

On April 29, 2011, the Appellate Division affirmed “for reasons stated in the decision at Supreme Court” (83 AD3d 1563, 1563 [4th Dept 2011]). The Court did not address Altshuler’s argument that the 2007 loan agreement was merely “a preliminary agreement that expired before the mortgage at issue was filed” because this contention was “raised for the first time on appeal and could have been obviated or cured by factual showings or legal countersteps in Supreme Court” (id. [internal quotation marks omitted]). On July 1, 2011, the same panel denied Altshuler’s motion for leave to appeal to us (86 AD3d 934 [4th Dept 2011]).

On October 26, 2011, Supreme Court issued an agreed-upon “Final Order for Judgment of Foreclosure and Sale,” which awarded Altshuler a judgment of $10 million; dismissed Altshuler’s causes of action seeking a declaration that its mortgage enjoyed first priority; set out the priority and amounts of the mechanic’s liens; ordered sale of the tower and Addis buildings; and directed the referee to file his report afterwards. The order also stayed the foreclosure sale of the tower building pending disposition of Altshuler’s appeal. Since Altshuler contested only the priority of rights to the proceeds from the sale, however, we declined to apply the exception to the finality rule for irreparable injury, and dismissed Altshuler’s appeal on February 9, 2012 (18 NY3d 892 [2012]); on May 3, 2012, we denied reargument (19 NY3d 837 [2012]). In the meantime, Supreme Court, by order signed March 29, 2012, vacated the stay of enforcement.

The tower building was sold at public auction on June 6, 2012 for $1,396,633.82, and Supreme Court confirmed the referee’s report on July 12, 2012. Hayner was the purchaser. Altshuler then again sought leave to appeal, which we granted on October 23, 2012 (19 NY3d 814 [2012]).

II.

Section 22 of the Lien Law requires that a building loan contract, with or without the sale of land and before or simultaneously with the recording of a building loan mortgage made pursuant to it, must be filed in the clerk’s office of the county where land subject to the contract is located, along with a borrower’s affidavit stating the consideration paid or to be paid for the loan, any expenses incurred or to be incurred in connection with the loan, and the net sum available for the construction project. Section 22 also mandates the filing of any subsequent modifications of a building loan contract within 10 days after their execution. Failure to comply with these filing 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, a construction lender must file the building loan contract in order to achieve lien priority, or, put the opposite way, the statute imposes a so-called “subordination penalty” on a lender who does not do this. We have said that the legislature enacted section 22 to permit contractors on construction projects “to learn exactly what sum the loan in fact made available to the owner of the real estate for the project” (Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243, 247 [1979] [holding that section 22 subjects a lender’s interest to the subordination penalty when the lender knowingly files a materially false borrower’s statement]).

Section 2 (13) of the Lien Law, defines a “building loan contract” as

“a contract whereby a . . . ‘lender,’ in consideration of the express promise of an owner to make an improvement[] upon real property, agrees to make advances to or for the account of such owner to be secured by a mortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid.”

And a “building loan mortgage” is “a mortgage made pursuant to a building loan contract . . . including] an agreement wherein and whereby a building loan mortgage is consolidated with existing mortgages so as to constitute one lien upon the mortgaged property” (Lien Law § 2 [14]).

The 2007 loan agreement is a building loan contract as defined under section 2 (13) of the Lien Law: the agreement called for transfer of $4.5 of the $10 million deposited by Altshuler into the trust account to a dedicated bank account of GML Tower/Ameris (the restricted account), to be “released if, when and as required to finance and pay [for] the construction of’ the improvements to the tower building, “subject to the terms and conditions of’ the construction plans, and these loan proceeds were to be secured by a mortgage. Because the 2007 loan agreement was a building loan contract, Lien Law § 22 obligated Altshuler to file the agreement in the Onondaga County Clerk’s office prior to the recording of any mortgage made pursuant thereto, or suffer loss of lien priority. Altshuler never filed the 2007 loan agreement; it recorded the 2007 mortgage on May 3, 2007.

Altshuler counters that the 2007 mortgage was not recorded “pursuant [ ]to” the 2007 loan agreement as required by Lien Law § 22; however, the recorded mortgage states that it is “to secure . . . payment and/or performance of all indebtedness and obligations of [GML Tower] and/or Ameris described in the [2007 loan agreement].” Additionally, the 2007 loan agreement directed that Altshuler’s security interest in the property be “perfected and duly recorded” in Onondaga County, and the agreement defined a security interest to include a mortgage. In short, the 2007 mortgage was made pursuant to the unfiled agreement.

Next, the 2008 amendment is explicitly labeled an “amendment” to the 2007 loan agreement, designed to “amend the terms and conditions for release of the [Remaining [flunds” to GML Tower and Ameris, and to “revise” the improvement plans in the agreement to fit the new plan to construct rental apartments rather than condominiums. In fact, the 2008 amendment is not a stand-alone document; it is essentially a compilation of edits of various provisions in the 2007 loan agreement, and must be read together with that earlier document in order to be intelligible. Altshuler never filed the 2008 amendment. This was another violation of section 22, which specifies that modifications of building loan contracts must be filed.

Altshuler contends, though, that assuming the 2007 loan agreement is a building loan contract (and we have now held that it is), the 2008 amendment converted the agreement into a standard loan contract, and the 2008 mortgage was recorded pursuant to the amendment, not the agreement. But even if Altshuler is correct that the 2007 loan agreement, as modified by the 2008 amendment, was no longer a building loan contract as defined by Lien Law § 2 (13)—a question we need not and do not decide—it does not follow that Altshuler was relieved of the obligation to file the amendment. Lien Law § 22 does not state that modifications to a building loan contract must be filed only so long as the contract, as modified, remains a building loan contract within the meaning of the Lien Law. This makes sense, given that the reason for public filing is to allow any interested contractors, subcontractors and material suppliers to discover the level of financing available for construction so that they might guide their actions accordingly (see Nanuet, 47 NY2d at 247). Further, if the 2007 loan agreement had been filed, as it should have been, Altshuler’s failure to file the 2008 amendment clearly would have violated the statute. Altshuler should not benefit from an earlier violation of the law.

III.

Finally, we consider whether Altshuler is entitled to priority with respect to the $5.5 million of the loan proceeds used to refinance the existing mortgage, which covered the tower building, the Addis building, and the hotel property. Before this litigation, the Atlantic Bank and Yankee Bank courts considered whether a subordination penalty applies to funds loaned in a building loan contract for financing the purchase of the property on which the improvements are to be made. They reached opposite conclusions.

In Atlantic Bank, a foreclosure action, the plaintiff bank sought summary judgment against the mechanic’s lienor defendants on the ground that its recorded mortgage had priority, at least to the extent of the $2.2 million loan given by it to the borrower for land acquisition. Applying a liberal interpretation, the Appellate Division took inclusion of the phrase “either with or without the sale of land” in section 22 to “impl[y] that if a lender fails to comply with the requirements of the Lien Law, its entire mortgage, including that part securing loan proceeds advanced for the purchase of the property, would become subordinate to any subsequently filed mechanic’s liens” (234 AD2d at 492 [emphasis added]).

Yankee Bank was a foreclosure action that was removed to federal court when the Federal Home Loan Bank Board found the plaintiff bank to be insolvent and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC was consequently effectively substituted for the bank as plaintiff. The subject of the litigation was another building in Syracuse, New York, and the issue before the District Court Judge was the priority of rights to the foreclosure sale proceeds as between the FDIC and the mechanic’s lienor defendants.

The Judge first decided that New York law supplied the rule of decision. In this particular case, the building loan contract between the bank and the developers allowed the bank to advance up to $610,000 for the acquisition of the building, and provided that no additional funds would be released until the developers obtained a surety payment bond. The bank, however, advanced funds beyond $610,000 without the required bond being in place. The mechanic’s lienor defendants argued that this was an unfiled modification of the contract in violation of Lien Law § 22. The Judge agreed, and so held that the bank’s mortgage would be subordinated to the defendants’ interests. He then turned his attention to the question of the degree of subordination.

The building loan contract apparently earmarked this first advance of $610,000 for acquisition of the building, and the parties do not seem to have disputed that money loaned for this purpose was not subject to the subordination penalty. In this regard, the Judge observed that

“[b]y definition a ‘building loan contract’ and ‘building loan mortgage’ only operate with respect to money lent for improvements on real property. Therefore, the proceeds from the loan which were lent for the purchase of the property are not subject to the subordination penalty of Lien Law § 22” (731 F Supp at 71 n 2 [citation omitted]).

In fact, though, the amount of the loan proceeds expended to buy the building was only approximately $250,000. As a result, the dispute between the FDIC and the mechanic’s lienor defendants centered on whether the FDIC had a first priority lien in the foreclosure sale proceeds for $610,000, or the lesser amount actually expended toward purchase of the building. The Judge ruled that the FDIC would enjoy first priority in an amount equivalent to what was actually spent (to be determined by the magistrate) rather than the full $610,000 in the first advance, and the mechanic’s lienor defendants would be paid any foreclosure sale proceeds beyond this amount.

This result is consistent with the language of Lien Law §§ 22 and 2 (3), (13) and (14), and does not contravene the statute’s purpose, to give contractors and material suppliers notice of how much money a building loan makes available for construction. Section 22 does not state that the entire interest of each party to an unfiled building loan contract is subject to a later-filed notice of lien, and we do not infer such a limitation from the phrase “either with or without the sale of land,” as did the Atlantic Bank court. As the Yankee Bank court pointed out, the subordination penalty logically applies only to funds loaned to pay for improvements. Here, the 2007 loan agreement allocated $5.5 million of the loan proceeds to pay off the existing purchase-money mortgage. This tranche 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. The 2008 mortgage, which Altshuler foreclosed in this litigation, simply extended the reach of and increased the principal amount secured by the 2007 mortgage. We therefore conclude that $5.5 million of the loan proceeds, secured by the 2007 and 2008 mortgages, was not subject to the subordination penalty.

Accordingly, the judgment appealed from and the order of the Appellate Division brought up for review should be modified, without costs, in accordance with this opinion and, as so modified, affirmed.

Graffeo, J. (concurring in part and dissenting in part).

I join that part of the majority opinion determining that the 2007 Loan Agreement was a building loan contract within the meaning of Lien Law § 22. However, because I read the plain language of the subordination penalty in this statute to apply to the lender’s “interest... in the real property”—the total mortgage and not just the portion attributable to construction funds—I respectfully dissent from the majority’s conclusion that $5.5 million of the loan proceeds was not subject to the subordination penalty.

As the majority explains, Lien Law § 22 establishes a recording requirement relating to a “building loan contract” as follows:

“A building loan contract either with or without the sale of land, and any modification thereof, must be in writing and duly acknowledged, and must contain a true statement under oath, verified by the borrower, showing the consideration paid, or to be paid, for the loan described therein, and showing all other expenses, if any, incurred, or to be incurred in connection therewith, and the net sum available to the borrower for the improvement, and, on or before the date of recording the building loan mortgage made pursuant thereto, to be filed in the office of the clerk of the county in which any part of the land is situated, except that any subsequent modification of any such building loan contract so filed must be filed within ten days after the execution of any such modification” (emphasis added).

As a consequence of the failure to comply with the recording requirement, Lien Law § 22 imposes what has come to be known as the subordination penalty, providing that if the building loan contract is “not so filed the interest of each party to such contract in the real property affected thereby, is subject to the lien and claim of a person who shall thereafter file a notice of lien under this chapter.” In other words, even though a lender’s mortgage might have been recorded first, if it was issued pursuant to a building loan contract that was not properly recorded, the lender’s mortgage loses its first-in-time priority and becomes subordinate to subsequently-recorded mechanic’s liens.

The recording requirement is intended to benefit contractors, laborers and material suppliers who work on construction projects. Its purpose is “to readily enable a contractor to learn exactly what sum the loan in fact made available to the owner of the real estate for the project” (Nanuet Natl. Bank v Eckerson Terrace, 47 NY2d 243, 247 [1979] [inclusion of false information in building loan contract that was recorded triggered subordination penalty]; see also Howard Sav. Bank v Lefcon Partnership, 209 AD2d 473, 476 [2d Dept 1994], lv dismissed 86 NY2d 837 [1995]), and to preclude lenders and owners from entering into “secret agreements” in that regard.

Plaintiff lender argues—and the majority accepts—that Lien Law § 22 does not require that the subordination penalty apply to the entire mortgage but covers only the portion relating to the advancement of construction funds. It further asserts that, since the purpose of the statute is to protect contractors, laborers and material suppliers, it makes no sense to preclude a lender from claiming priority with respect to the portion of the loan that had nothing to do with construction but related to the initial acquisition of the property. In my view, this argument should be rejected because the plain language of the statute directs that the full mortgage interest—not just the part securing the funds used for construction purposes—is subject to the subordination penalty, as two New York courts had held before the Appellate Division reached the same conclusion in this case (see Atlantic Bank of N.Y. v Forrest House Holding Co., 234 AD2d 491 [2d Dept 1996]; HNC Realty Co. v Golan Hgts. Devs., 79 Misc 2d 696 [Sup Ct 1974]).

Critically, Lien Law § 22 begins by indicating that the statute applies to “[a] building loan contract either with or without the sale of land,” thereby contemplating building loan agreements in which money is loaned both to purchase the property and construct improvements. Thus, just because some of the funds disbursed relate to the acquisition of the real property to be improved (or, in this case, the refinance of a mortgage previously used to acquire the real property to be improved), this does not prevent a loan agreement that otherwise meets the building loan contract criteria from being subject to the recording rule (as the majority also concludes). It is therefore clear that the legislature understood that there would be contracts like the one here where acquisition funds and construction monies would be addressed in a single loan secured by a mortgage. Nonetheless the subordination penalty that appears later in the statute does not include any language indicating an intent to exclude that portion of a mortgage securing acquisition funds from its scope. Rather, it provides, in broad terms, that “the interest of each party to such contract in the real property affected thereby, is subject to the lien and claim of a person” who later files a mechanic’s lien (Lien Law § 22 [emphasis added]). It is the “interest” of the lender “in the real property” that is subordinated to later-filed mechanic’s liens— and the lender’s interest in the real property is reflected in the entire mortgage, not merely a portion of it. As the Appellate Division explained in Atlantic Bank,

“if a lender fails to comply with the requirements of the Lien Law, its entire mortgage, including that part securing loan proceeds advanced for the purchase of the property, would become subordinate to any subsequently filed mechanic’s liens. This interpretation is consistent with the overriding concern that the lender is the party responsible for compliance and that the threat of the loss of priority is an effective deterrent against a lender shirking this responsibility ... To the extent that this outcome may be harsh, it must be understood that we are here dealing not with equitable redress, but with a statutorily imposed penalty” (Atlantic Bank, 234 AD2d at 492 [internal quotation marks and citation omitted]).

In arguing to the contrary, the lender relies on Yankee Bank for Fin. & Sav., FSB v Task Assoc., Inc. (731 F Supp 64 [ND NY 1990]), a federal district court decision that was issued before the Appellate Division decided Atlantic Bank. Although the majority finds this case to be persuasive, I believe that reliance is misplaced. First, as the majority acknowledges, in Yankee Bank neither party asserted that funds used for acquisition of the building were subject to the subordination penalty so the court was not confronted with the precise issue presented here. Second, without addressing the plain language in the subordination penalty, the District Court held in summary fashion that the lender retained its first priority interest in the foreclosure sale proceeds “only up to that amount actually expended toward the purchase of the . . . building,” with the remainder of its interest subordinated to the mechanic’s lienors (731 F Supp at 71-72). It is evident from a footnote that, rather than interpreting the subordination penalty itself, the court considered only the definitions of “building loan contract” and “building loan mortgage.” Noting (erroneously, in my view) that these definitions relate only to monies advanced for improvements on property, the court reasoned that “the proceeds from the loan which were lent for the purchase of the property [were] not subject to the subordination penalty” (731 F Supp at 71 n 2). But I believe that the Lien Law takes a more encompassing view. Section 22 makes clear that the subordination penalty applies to a building loan contract, regardless of whether it involves the sale of land, and then indicates it is the lender’s interest in the real property that is subordinated. The lender’s interest in the property is the total mortgage, not just the portion that correlates to the loan of construction funds. I therefore prefer the better-reasoned New York precedent.

Since the statutory language warrants a finding that the entire mortgage is subordinated when a building loan contract is not recorded, both Supreme Court and the Appellate Division properly concluded in this case that the lender’s $10 million mortgage was subordinate to the mechanic’s liens. Although this appears to wipe out any recovery for the lender, the legislature adopted this statutory penalty to dissuade lenders from engaging in the very conduct that occurred here: failing to comply with the building loan contract recording requirement. Here, none of the agreements relating to this loan were recorded: not the Loan Agreement, the Memorandum of Understanding nor Amendment No. 1, which was executed contemporaneously with the 2008 mortgage. And timely filing of documents and amendments is particularly necessary in cases such as this where aspects of the loan fail to close on time and material terms are amended while the project is ongoing—facts that can raise red flags to interested contractors, laborers and material suppliers if revealed.

I believe that the rule the majority has fashioned is antithetical to the purpose of the penalty and is likely to prove difficult to enforce. The subordination penalty is triggered when a lender fails to record a building loan contract or amendments thereto, or when information in filed agreements proves to be false. The burden it imposes on lenders is minimal—the statutory requirement is met merely by filing the pertinent documents in the county clerk’s office. One of the purposes behind the recording requirement is to make future contractors, laborers and material suppliers aware of the funds available for construction so that, prior to working on a project, they can make knowledgeable decisions concerning the amount of labor or materials to expend and the type of payment and security terms to demand. When acquisition funds are part of the loan, this necessarily diminishes the amount available to fund improvements on the real property. But if contractors are unaware of the extent to which the loan covers acquisition costs due to the failure to file a building loan contract, they may expend more labor and materials, and on different terms, than would have been the case had they been provided with the accurate information that the statute requires.

Moreover, if documents are not timely filed prior to the recording of the mortgage, resulting in the terms of the loan not being reflected in the public record, courts will be left to reconstruct the loan agreement between the lender and the building owner after the fact during a foreclosure action or other litigation when there may be disputes concerning the scope of the contract and the intent and effect of various written and oral modifications. This problem is apparent here where the lender’s view concerning the terms of the arrangement— whether certain documents were superceded or remained in effect—has evolved over the course of litigation and where the defaulting borrower did not participate and clarify the record. The bottom line is that, after a deal has gone south, it may be difficult to discern precisely what proportion of a loan was earmarked for acquisition expenses and what portion was actually expended for that purpose (a dispute of that kind apparently arose in Yankee Bank)—and the courts, as well as the contractors, laborers and material suppliers will be at the mercy of the parties to the loan to resolve the controversy. Timely recording of the proper documents when the loan occurs and prior to the filing of the mortgage obviates this problem. Of course, the subordination penalty will only come into play when that has not happened and I fear that the rule the majority adopts today will add to the confusion.

For all of these reasons, I conclude that the majority’s bifurcation rule unnecessarily complicates the application of the subordination penalty which, as constructed by the legislature, should be straightforward and require nothing more than giving the lender’s mortgage the priority it would have had if it had been recorded after the mechanic’s liens. The legislature appears to have made a considered decision that as between the lender, who could have protected its investment in full merely by timely recording its documents, and the contractors, laborers and material suppliers, who were inappropriately kept in the dark, it is the lender who should bear the loss. It is not for the courts to disturb that decision by creating a limitation on the subordination penalty that does not appear anywhere in the statute. Because the majority does so, I respectfully dissent from the majority’s opinion to the extent that it holds that $5.5 million of the loan proceeds was not subject to the subordination penalty.

Chief Judge Lippman and Judges Smith, Pigott and Rivera concur with Judge Read; Judge Graffeo dissents in part in an opinion; Judge Abdus-Salaam taking no part.

Judgment appealed from and order of the Appellate Division brought up for review modified, without costs, in accordance with the opinion herein and, as so modified, affirmed.

      . The plans for renovation, improvements and marketing of the tower building, exhibit B to the agreement, are not included in the record.

      . The 2008 amendment, a 41-page document plus annexes and exhibits, refers to the 2007 loan agreement as the “Original Loan Agreement,” as “supplemented and modified” by the MOU.

      . These GML entities and Ameris eventually defaulted in this litigation, as did another defendant, Ameris’s principal, who had given his personal guaranty for $250,000 when Altshuler transferred the loan proceeds remaining in the trust account (roughly $2 million) to GML Tower and Ameris on March 6, 2008 pursuant to the 2008 amendment.

      . Although not pursuing the option in this case, the Appellate Division may, in the exercise of its “interests of justice” jurisdiction, always reach an issue not preserved at Supreme Court (see Martin v City of Cohoes, 37 NY2d 162, 165 [1975]). The Court of Appeals, by contrast, generally lacks power to review unpreserved issues even where the Appellate Division has chosen to do so (see Brown v City of New York, 60 NY2d 893, 894 [1983]; see also Hecker v State of New York, 20 NY3d 1087, 1087 [2013]).

      . There were no mechanic’s liens filed against the Addis building, which sold at public auction on August 7, 2012 for $200,000. Altshuler was paid $198,750, the sale proceeds less the referee’s fee.

      . The tower building’s sale price was just sufficient to pay Pike, to pay Hayner’s subcontractors, to reimburse Altshuler for expenses incurred during the pendency of the foreclosure, and to pay the referee’s expenses, with $1,711.89 left over to refund to Hayner.

      . Section 22, in relevant part, states as follows:
      “A building loan contract either with or without the sale of land, and any modification thereof, must be in writing and duly acknowledged, and must contain a true statement under oath, verified by the borrower, showing the consideration paid, or to be paid, for the loan described therein, and showing all other expenses, if any, incurred, or to be incurred in connection therewith, and the net sum available to the borrower for the improvement, and, on or before the date of recording the building loan mortgage made pursuant thereto, to be filed in the office of the clerk of the county in which any part of the land is situated, except that any subsequent modification of any such building loan contract so filed must be filed within ten days after the execution of any such modification. ... If not so filed the interest of each party to such contract in the real property affected thereby, is subject to the

        lien and claim of a person who shall thereafter file a notice of lien under [the Lien Law]” (emphasis added).

        (n. cont’d)

      . Section 2 (4) of the Lien Law defines “improvement” to include, among other things,
      “the demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement.”

      . Although section 22 states that “any subsequent modification” (emphasis added) to a building loan contract must be filed, this language, which also appeared in section 22’s predecessor statute, former Mechanics’ Lien Law § 21, has always been interpreted to mean any “material” subsequent modification (see Pennsylvania Steel Co. v Title Guar. & Trust Co., 193 NY 37, 42 [1908], rearg denied 193 NY 682 [1908]). The Appellate Divisions have set out a test for determining when a modification qualifies as material (see HNC Realty Co. v Bay View Towers Apts., 64 AD2d 417, 426 [2d Dept 1978] [“a modification of a building loan contract is ‘material’ if it (1) alters the rights and liabilities otherwise existing between the parties to the agreement or (2) enlarges, restricts or impairs the rights of any third-party beneficiary”]; Howard Sav. Bank v Lefcon Partnership, 209 AD2d 473, 475 [2d Dept 1994] [same]). In the absence of precedent from our court, the federal courts have applied the HNC Realty test (see Yankee Bank, 731 F Supp at 70 [holding that unfiled modification was material because it restricted or impaired the rights of a third-party beneficiary]; In re Lynch III Props. Corp., 125 BR 857, 861 [Bankr ED NY 1991] [holding that the unfiled modification was “not a material modification . . . within the meaning of section 22 of the New York Lien Law” because “(t)he rights of the mechanics’ lienors, even if they would be third-party beneficiaries, have not been restricted or impaired and they retain all of the rights that exist under the filed Building Loan Agreements”]; but see In re Admiral’s Walk, Inc., 134 BR 105, 121 [Bankr WD NY 1991] [criticizing HNC Realty, and suggesting that the underlying facts in cases considering the materiality of a modification have never shown that “alteration of rights as between the lender and borrower is . . . alone sufficient to warrant subordination—there must also be some element of impairment of rights of section 22 beneficiaries in order that a modification be so ‘material’ or ‘essential’ as to warrant its fifing, on penalty of subordination”]).
      We do not need to address the proper test for materiality on this appeal. By arguing that the 2008 amendment transformed the fundamental character of the 2007 loan agreement, Altshuler effectively concedes that the amendment worked a material modification under any conceivable test.

      . The dissent opines that the subordination penalty will “likely . . . prove difficult to enforce” if loan proceeds for property acquisition are excluded from its scope, commenting that “it may be difficult to discern precisely what proportion of a loan was earmarked for acquisition expenses and what portion was actually expended for that purpose,” pointing to the referral to the magistrate in Yankee Bank as an example (dissenting op at 372). First, there does not seem to have been much dispute in Yankee Bank over how much of the loan was actually applied to the building’s purchase price (there was a deed filed in the county clerk’s office, after all). Rather, the record was apparently incomplete on this score because the magistrate had concluded that the rights of the mechanic’s lienor defendants were to be determined with reference to the amount committed by the loan agreement toward acquisition rather than the amount actually spent for that purpose. In this case there is no difference between the amount of the loan “earmarked” and “actually expended” to refinance the loan made to acquire the three properties making up the hotel complex—i.e., $5.5 million. This is probably by far the more common situation. In any event, given that the amount “earmarked” and the amount “actually expended” are identical in this case, we need not resolve and express no opinion as to which would be properly excluded from the scope of the subordination penalty in a case, like Yankee Bank, where there is a difference.


source: Caselaw Access Project

author: Chief Judge Lippman.

license: Public Domain

text:
      [993 NE2d 1257, 971 NYS2d 237]
    The People of the State of New York, Respondent, v Jean Cantave, Appellant.
    Argued May 29, 2013;
    decided June 25, 2013

      POINTS OF COUNSEL

      Lynn W.L. Fahey, Appellate Advocates, New York City (De Nice Powell of counsel), for appellant.
    I. The court violated appellant’s Fifth Amendment privilege against self-incrimination and due process right to testify at his trial when it granted the People’s request to cross-examine him about the underlying facts of a conviction that was then pending on direct appeal. (People v Betts, 70 NY2d 289; Rock v Arkansas, 483 US 44; Spradling v Texas, 455 US 971; Chambers v Mississippi, 410 US 284; Brooks v Tennessee, 406 US 605; Jones v Barnes, 463 US 745; Culombe v Connecticut, 367 US 568; Lefkowitz v Turley, 414 US 70; Grunewald v United States, 353 US 391; Estelle v Smith, 451 US 454.) II. The court erred when it refused to admit appellant’s 911 call into evidence as an excited utterance or present sense impression when he made the call immediately after the complainant confronted and attacked him with a gun, while the complainant remained at the scene. (People v Vasquez, 88 NY2d 561; People v Nieves, 67 NY2d 125; People v Johnson, 1 NY3d 302; People v Brown, 70 NY2d 513; People v Caviness, 38 NY2d 227; People v Marks, 6 NY2d 67; People v Cotto, 92 NY2d 68; People v Edwards, 47 NY2d 493; People v Brooks, 71 NY2d 877; People v Perez, 221 AD2d 169.)

      Richard A. Brown, District Attorney, Kew Gardens (William H. Branigan, Robert J. Masters and John M. Castellano of counsel), for respondent.
    I. Defendant failed to preserve his claim that the trial court’s Sandoval ruling was improper. In any event, the trial court acted consistent with precedent from this Court, the federal courts, and the majority of other jurisdictions in permitting questions about defendant’s prior conviction that was pending appeal. (People v Brady, 97 NY2d 233; People v Betts, 70 NY2d 289; Ottomano v United States, 468 F2d 269; People v Sandoval, 34 NY2d 371; People v Walker, 83 NY2d 455; People v Bonaparte, 78 NY2d 26; People v Whipple, 97 NY2d 1; People v Mackey, 49 NY2d 274; People v Shields, 46 NY2d 764.) II. The court properly excluded the recording of defendant’s call to 911. (People v Melendez, 296 AD2d 424; People v Marks, 6 NY2d 67; People v Vasquez, 88 NY2d 561; People v Brown, 70 NY2d 513; People v Edwards, 47 NY2d 493; People v Cotto, 92 NY2d 68; People v Sostre, 51 NY2d 958; People v Johnson, 1 NY3d 302; People v Kello, 96 NY2d 740; People v Paige, 283 AD2d 445.)
   OPINION OF THE COURT

Chief Judge Lippman.

The primary issue presented by this appeal is whether the court violated defendant’s Fifth Amendment privilege against self-incrimination when it granted the People’s request to cross-examine him about the underlying facts of a rape conviction that was then on direct appeal. For the reasons discussed below, we hold that a defendant with a conviction pending appeal may not be cross-examined in another matter about the underlying facts of that conviction until direct appeal has been exhausted.

Defendant was charged with second-degree and third-degree assault as a result of a confrontation outside his place of business at which only defendant, complainant Andre Elbresius, and Elbresius’s wife were present. Defendant and Elbresius were neighbors and acquaintances. A few hours before their altercation, Elbresius had given defendant a ride in his car, and they had argued about defendant’s unauthorized use of Elbresius’s spare license plate. The argument escalated to a confrontation at defendant’s place of business. Elbresius claimed that defendant was the sole aggressor, pushing and biting Elbresius on his finger and ear, for which he required surgery. Defendant claimed that Elbresius was the initial aggressor and hit defendant in the face with a gun, which he reported to a 911 emergency operator.

At trial, the defense was justification and defendant planned to testify, but the People received permission, after a Sandoval hearing, to cross-examine him about his recent rape conviction, still pending on direct appeal, as well as the underlying facts, and. the sentence he received. After the defense rested, defense counsel asked the court to reconsider the Sandoval ruling, objecting that an appeal of the rape conviction was pending and, therefore, cross-examination about the conviction and its underlying facts would violate defendant’s constitutional privilege against self-incrimination, but the court adhered to its ruling. Defendant did not testify and was convicted of third-degree assault. Subsequently, his conviction for rape was reversed for ineffective assistance of counsel, his prior attorney having failed to impeach the complainant with exculpatory hospital records (People v Cantave, 83 AD3d 857 [2d Dept 2011], lv denied 17 NY3d 857 [2011]). Defendant was retried and acquitted.

Defense counsel also sought to admit defendant’s 911 call, which recorded defendant seeking police assistance and reporting an attack by a man with a gun who was still at the scene. Counsel argued that the call should be admitted under either the excited utterance or present sense impression exception to the hearsay rule. Although the court acknowledged that of the two theories of admission, present sense impression would be the hearsay exception that would allow the call to be admitted, the court excluded the call, finding that defendant “had sufficient time to think about what he was going to say to 911.”

The Appellate Division affirmed (93 AD3d 677 [2d Dept 2012]), finding the Sandoval issue unpreserved, and in any event found that the admission of the underlying facts of defendant’s rape conviction was not an abuse of discretion. The court also held the 911 call properly excluded, finding it neither an excited utterance nor a present sense impression. A Judge of this Court granted leave to appeal (19 NY3d 958 [2012]), and we now reverse.

I.

As a threshold matter, we find the Sandoval issue preserved. To preserve an issue for review, counsel must register an objection and apprise the court of grounds upon which the objection is based “at the time” of the allegedly erroneous ruling “or at any subsequent time when the court had an opportunity of effectively changing the same” (CPL 470.05 [2]). After the defense rested but before either side presented closing remarks, defense counsel asked the court to reconsider its Sandoval ruling, specifically informing the court that the rape conviction was then “under appeal,” and asserting that defendant’s Fifth Amendment privilege against self-incrimination should preclude cross-examination about it. This objection was lodged at a time when the court had the “opportunity of effectively changing” its ruling (CPL 470.05 [2]), since neither side had yet presented closing remarks and the jury had not yet commenced deliberations (People v Olsen, 34 NY2d 349, 353 [1974] [court has power to alter order of proof and, concomitantly, reopen the proof, at least until the jury commences deliberations]; CPL 260.30). Therefore, we may review the Sandoval issue on the merits.

II.

The privilege against self-incrimination, which “must be accorded liberal construction in favor” of the protection it affords the accused (Hoffman v United States, 341 US 479, 486 [1951]), allows him to not answer “official questions put to him in any . . . proceeding, civil or criminal, formal or informal, where the answers might incriminate him in future criminal proceedings” (Lefkowitz v Turley, 414 US 70, 77 [1973]). A defendant who elects to testify places his credibility at issue and may generally be cross-examined about past criminal or immoral acts that bear upon his credibility, veracity, or honesty (People v Bennett, 79 NY2d 464, 468 [1992]), but he does not automatically waive the constitutional protection against cross-examination regarding pending criminal charges (People v Betts, 70 NY2d 289, 292 [1987]).

In Betts, defense counsel objected to cross-examination about a pending, unrelated charge, asserting that, if questioned about it, Mr. Betts would invoke his Fifth Amendment privilege against self-incrimination. The trial court, however, allowed the cross-examination and ruled that Mr. Betts would not be permitted to assert his Fifth Amendment right (Betts, 70 NY2d at 291-292). We reversed the judgment and ordered a new trial and held that the prosecution may not cross-examine a defendant about a pending, unrelated criminal matter for the purpose of impeaching his credibility (id. at 295). We stated,

“Allowing a defendant-witness’ credibility to be assailed through the use of cross-examination concerning an unrelated pending criminal charge unduly compromises the defendant’s right to testify with respect to the case on trial, while simultaneously jeopardizing the correspondingly important right not to incriminate oneself as to the pending matter.” (Id.)

Defendant urges us to extend the Betts holding to apply not only to a pending criminal charge, but also to facts underlying a conviction pending appeal. We are persuaded that the same concerns that animated Betts apply here. When tried in the instant case, defendant had been convicted of rape, but he was pursuing a direct appeal, as of right, of that conviction. Thus, he remained at risk of self-incrimination until he exhausted his right to appeal (cf. Mitchell v United States, 526 US 314, 326 [1999] [“If no adverse consequences can be visited upon the convicted person by reason of further testimony, then there is no further incrimination to be feared”]). If defendant testified in the instant case, any testimony elicited on cross-examination about the rape case could later be used against him at a new trial, which is “further incrimination to be feared” (Mitchell, 526 US at 326).

Although the record is sparse on the issue, in ruling that the prosecution could cross-examine defendant about the underlying facts of his rape conviction, presumably the court was not implying that defendant could not assert his Fifth Amendment privilege in response to those questions. However, “taking the Fifth” is highly prejudicial as to both the instant case and the conviction pending appeal. To a jury, it appears as though defendant is admitting the truth of the leading questions posed by the prosecutor; “[i]t exerts an undeniable chilling effect upon a real ‘choice’ whether to testify in one’s own behalf’ (Betts, 70 NY2d at 292). More problematic, defendant must invoke the Fifth Amendment as to both exculpatory and inculpatory questions to protect himself; otherwise he might waive the privilege (Brown v United States, 356 US 148, 156 [1958]; see also People v Bagby, 65 NY2d 410, 414 [1985] [“(A) witness who foregoes the protection of the constitutional privilege against self-incrimination by giving testimony to his advantage . . . cannot in the same proceeding assert the privilege and refuse to answer questions that are to his disadvantage” (citing People v Cassidy, 213 NY 388, 394 [1915])]). The risk of this cross-examination would place defendant in a similar quandary to that faced by Mr. Betts. Being questioned about the facts underlying the previous conviction while it is pending appeal “unduly compromises the defendant’s right to testify with respect to the case on trial, while simultaneously jeopardizing the correspondingly important right not to incriminate oneself as to the pending matter” (Betts, 70 NY2d at 295). The practical effect of the court’s Sandoval ruling was to prevent defendant’s testimony entirely.

We hold that the prosecution may not cross-examine a defendant about the underlying facts of an unrelated criminal conviction on appeal, for the purpose of impeaching his credibility. The trial court’s ruling violated the defendant’s privilege against self-incrimination with respect to the admission of the underlying facts of the rape conviction.

III.

The trial court did not abuse its discretion by excluding the 911 call, because neither the tenor nor timing of the call served to qualify it as an excited utterance or a present sense impression. Defendant, as the proponent of admission, had, but did not satisfy, the burden of proving that the call fell under the excited utterance exception (People v Brensic, 70 NY2d 9, 14 [1987], citing People v Nieves, 67 NY2d 125, 131 [1986]). Excited utterances are exceptions to the hearsay rule because the declarant is exposed to a startling or upsetting event that is “sufficiently powerful to render [his] normal reflective processes inoperative” (People v Vasquez, 88 NY2d 561, 574 [1996]). “The essential element” of this hearsay exception “is that the declarant spoke while under the stress or influence of the excitement caused by the event, so that his reflective capacity was stilled” (Nieves, 67 NY2d at 135). The spontaneity of the declaration guarantees its trustworthiness and reliability (see People v Johnson, 1 NY3d 302 [2003]).

While somewhat agitated on the call, defendant’s voice did not evidence an inability to reflect upon the events, which would have supported an excited utterance exception to hearsay. It is somewhat suspect that defendant failed to report the names of Mr. and Mrs. Elbresius to the 911 operator, since he knew them well, and instead seemed to refer to them as unknown assailants. Additionally, despite claiming to have been assaulted, defendant did not complain of an injury or request an ambulance until questioned specifically about an injury, pain and the need for emergency services by the 911 operator. Defendant’s statements on the recording could reflect an evolving fabrication prompted by the operator’s questioning (see People v Edwards, 47 NY2d 493, 499 [1979] [whether a statement is prompted by inquiry is one factor to consider in determining whether statement was spontaneous]). Most notably, defendant omitted entirely that he had bit off a part of the victim’s ear and injured his finger. Such an omission is evidence that defendant had the opportunity, and likely the intent, to distort the facts. Additionally, defendant’s medical records refute any claim that defendant was injured in a way that would detract from his ability to reflect upon events, because they contain no evidence of an injury to defendant’s face (see Johnson, 1 NY3d at 307 [citing to medical records and officer’s testimony to determine that victim’s statement was not excited]). In deciding to exclude the call, the court acted within its discretion, which is apparent from its careful review of the details of the 911 call, and applicable case law (see e.g. People v Melendez, 296 AD2d 424, 425-426 [2d Dept 2002] [declarant’s statement that she stabbed a man who pursued her with a gun was admissible]).

It was also not error to preclude the 911 call based on defendant’s alternative theory of admission. To qualify as a present sense impression, the out-of-court statement must be (1) made by a person perceiving the event as it is unfolding or immediately afterward (Vasquez, 88 NY2d at 574-575; People v Brown, 80 NY2d 729, 732-734 [1993]), and (2) corroborated by independent evidence establishing the reliability of the contents of the statement (id.). There was no evidence to show that defendant’s statements were made spontaneously and contemporaneously with the events described, nor was defendant’s description of what happened corroborated by other evidence (Brown, 80 NY2d at 734-735).

Accordingly, the order of the Appellate Division should be reversed and a new trial ordered.

Judges Graffeo, Read, Smith, Pigott, Rivera and Abdus-Saiaam concur.

Order reversed and a new trial ordered.

      . We have extended the Betts ruling before. In People v Smith (87 NY2d 715 [1996]), in the context of grand jury testimony, we emphasized that allowing questioning about an unrelated pending criminal matter has an impermissible “chilling effect” on the accused’s “significant” and “valued” statutory right to testify, which must be “scrupulously protected.” We held in Smith that when a defendant testifies before a grand jury, the prosecution may not cross-examine him about a pending, unrelated criminal matter in order to assail his credibility (87 NY2d at 720-721).

      . In that regard, this case is distinguishable from People v Brady (97 NY2d 233 [2002]), in which we upheld a Sandoval ruling permitting cross-examination of a defendant about a prior, unrelated crime to which he waived his Fifth Amendment right and pleaded guilty 18 months earlier. During the plea colloquy, Brady waived his right to appeal, and for the subsequent 18 months his plea was undisturbed and unchallenged (id. at 235-237). Thus, unlike this case, the defendant in Brady had no fear of exposure from the prosecution’s use of his testimony.

      . Whether the court properly balanced the Sandoval factors—the prejudicial nature of the evidence, and its relative probative value—is not a question before us. We are only concerned with defendant’s rights with respect to the Fifth Amendment privilege against self-incrimination.


author: Smith, J.

text:
    [993 NE2d 1249, 971 NYS2d 229]
    K2 Investment Group, LLC, et al., Respondents-Appellants, v American Guarantee & Liability Insurance Company, Appellant-Respondent.
    Argued April 25, 2013;
    decided June 11, 2013

      POINTS OF COUNSEL

      Coughlin Duffy LLP, New York City (Robert J. Kelly and Michael S. Chuven of counsel), and Steinberg & Cavaliere, LLP, White Plains, for appellant-respondent.
    I. The lower court erred as a matter of law in affording the insured status exclusion and business enterprise exclusion an unduly narrow scope. (Fox v Employers’ Liab. Assur. Corp., Ltd., of London, 243 App Div 325, 267 NY 609; Wenig v Glens Falls Indem. Co., 294 NY 195; Holmes v Allstate Ins. Co., 33 AD2d 96; Maurice Goldman & Sons v Hanover Ins. Co., 80 NY2d 986; American Guar. & Liab. Ins. Co. v Timothy S. Keiter, P.A., 360 F3d 13; Niagara Fire Ins. Co. v Pepicelli, Pepicelli, Watts & Youngs, P.C., 821 F2d 216; Bretton v Mutual of Omaha Ins. Co., 110 AD2d 46; Maroney v New York Cent. Mut. Fire Ins. Co., 5 NY3d 467; Regal Constr.

      Corp. v National Union Fire Ins. Co. of Pittsburgh, PA, 15 NY3d 34; Salzman & Salzman v Home Ins. Co., 258 AD2d 455.) II. The Appellate Division majority committed reversible error in limiting its consideration of relevant facts to the allegations contained in the complaint. (Servidone Constr. Corp. v Security Ins. Co. of Hartford, 64 NY2d 419; Fitzpatrick v American Honda Motor Co., 78 NY2d 61; Robbins v Michigan Millers Mut. Ins. Co., 236 AD2d 769; Atlantic Mut. Ins. Co. v Terk Tech. Corp., 309 AD2d 22; First State Ins. Co. v J & S United Amusement Corp., 67 NY2d 1044; Rucaj v Progressive Ins. Co., 19 AD3d 270; Lang v Hanover Ins. Co., 3 NY3d 350; Hough v USAA Cas. Ins. Co., 93 AD3d 405; Utica First Ins. Co. v StarBrite Painting & Paperhanging, 36 AD3d 794; Dimond v Kazmierczuk & McGrath, 15 AD3d 526, 5 NY3d 715.) III. The case law relied on by the Appellate Division majority supports a reversal of its decision. (American Guar. & Liab. Ins. Co. v Moskowitz, 58 AD3d 426; Oot v Home Ins. Co. of Ind., 244 AD2d 62; Niagara Fire Ins. Co. v Pepicelli, Pepicelli, Watts & Youngs, P.C., 821 F2d 216; Servidone Constr. Corp. v Security Ins. Co. of Hartford, 64 NY2d 419; Forrest v Jewish Guild for the Blind, 3 NY3d 295.) IV Respondents’ summary judgment motion should have been denied because material questions of fact exist. (Groves v Land’s End Hous. Co., 80 NY2d 978.)

      Law Offices of Michael A. Haskel, Mineola (Michael A. Haskel, Susan Haskel and Brandon M. Zlotnick of counsel), for respondents-appellants.
    I. The Appellate Division order correctly affirmed the Supreme Court’s grant of summary judgment to K2 Investment Group, LLC/ATAS Management Group, LLC on their claims under Insurance Law § 3420 (a). (Ramos v National Cas. Co., 227 AD2d 250; Rosenberg v Litas Inv. Co., 212 AD2d 686; Goldstein v Engel, 240 AD2d 280; Worldwide Asset Purch., LLC v Karafotias, 9 Misc 3d 390; Cobb v City of New York, 272 AD2d 117; Lang v Hanover Ins. Co., 3 NY3d 350; Rucaj v Progressive Ins. Co., 19 AD3d 270; Nelson v Kalathara, 48 AD3d 528; Hallman v Kantor, 72 AD3d 895, 15 NY3d 706; Mendoza v Schlossman, 87 AD2d 606.) II. Instead of granting summary judgment dismissing the bad faith claims of K2 Investment Group, LLC/ATAS Management Group, LLC, the Appellate Division order should have awarded summary judgment to K2/ ATAS on these claims. (Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131; Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 NY2d 169; Sport Rock Intl., Inc. v American Cas. Co. of Reading, Pa., 65 AD3d 12; Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435; Panasia Estates, Inc.

      v Hudson Ins. Co., 39 AD3d 343, 10 NY3d 200; Sukup v State of New York, 19 NY2d 519; Birsett v General Acc. Ins. Co. of Am., 226 AD2d 1027, 88 NY2d 1005; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445; Federal Ins. Co. v North Am. Specialty Ins. Co., 83 AD3d 401; Daus v Lumbermen’s Mut. Cas. Co., 241 AD2d 665.) III. Summary judgment awarded in favor of American Guarantee and Liability Insurance Co. on the third and fourth causes of action was reversible error. (Winegrad v New York Univ. Med. Ctr., 64 NY2d 851.)
   OPINION OF THE COURT

Smith, J.

We hold that, when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.

I

Plaintiffs are two limited liability companies that made loans totaling $2.83 million to a third such company, Goldan, LLC. The loans were to be secured by mortgages. Goldan failed to repay the loans, and plaintiffs discovered that their mortgages had not been recorded. A bankruptcy petition was later filed against Goldan.

Plaintiffs brought a lawsuit against Goldan and its two principals, Mark Goldman and Jeffrey Daniels, asserting a number of claims. One claim was asserted by each plaintiff against Daniels, a lawyer, for legal malpractice. Plaintiffs alleged that Daniels acted as their attorney with respect to their loans to Goldan, and that his failure to record the mortgages was “a departure from good and accepted legal practice.”

Daniels notified his malpractice carrier, American Guarantee and Liability Insurance Company, of the malpractice claims against him, and forwarded a copy of the complaint. American Guarantee refused to provide “either defense or indemnity coverage,” for the reason, among others, that the allegations against Daniels “are not based on the rendering or failing to render legal services for others.” After this disclaimer, plaintiffs made a settlement demand on Daniels for $450,000— significantly less than the $2 million limit of American Guarantee’s policy. Daniels transmitted the demand to American Guarantee, which rejected it for the reasons it had previously given for denying coverage.

Daniels defaulted in plaintiffs’ action against him, and plaintiffs obtained a default judgment in excess of the policy limit. The judgment was entered only as to plaintiffs’ legal malpractice claims; their other claims against Daniels were discontinued. After judgment was entered, Daniels assigned to plaintiffs all his rights against American Guarantee and plaintiffs, as Daniels’s assignees, brought the present action against American Guarantee for breach of contract and bad faith failure to settle the underlying lawsuit. On their contract claims, plaintiffs seek to recover the $2 million policy limit, and on their bad faith claims they seek to recover the full amount of their default judgment.

American Guarantee moved for summary judgment dismissing the complaint, relying on two policy exclusions, the so-called “insured’s status” and “business enterprise” exclusions. The policy issued by American Guarantee says, in relevant part:

“This policy shall not apply to any Claim based upon or arising out of, in whole or in part. . .
“D. the Insured’s capacity or status as:
“1. an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise . . .
“E. the alleged acts or omissions by any Insured, with or without compensation, for any business enterprise, whether for profit or not-for-profit, in which any Insured has a Controlling Interest.”

According to American Guarantee, the claim against Daniels arose out of his “capacity or status” as a member and owner (and thus presumably at least a “manager”) of Goldan, and out of his “acts or omissions” on Goldan’s behalf.

Plaintiffs cross-moved for summary judgment in their favor. Supreme Court granted plaintiffs’ motion as to the breach of contract claims, holding that American Guarantee breached its duty to defend Daniels, and was therefore bound, up to the $2 million limit of its policy, to pay the resulting judgment against him. The court dismissed the bad faith claims (2010 NY Slip Op 33801[U] [2010]).

The Appellate Division affirmed, with two justices dissenting in part (K2 Inv. Group, LLC v American Guar. & Liab. Ins. Co., 91 AD3d 401 [1st Dept 2012]). The majority held that the exclusions American Guarantee relied on were inapplicable to the malpractice claim on which the default judgment against Daniels was based (id. at 403-405). The dissent concluded that issues of fact existed as to whether the exclusions applied (id. at 405-411 [Andrias, J., dissenting]).

American Guarantee appeals to us as of right pursuant to CPLR 5601 (a), on the basis of the two-justice dissent in its favor. Plaintiffs cross-appeal pursuant to leave granted by this Court. We now affirm on both the appeal and the cross appeal.

II

We affirm the summary judgment in plaintiffs’ favor on the breach of contract claims without reaching the question that divided the Appellate Division: the applicability of the insured’s status exclusion and the business enterprise exclusion to American Guarantee’s duty to indemnify Daniels for a judgment based on legal malpractice. We hold that, by breaching its duty to defend Daniels, American Guarantee lost its right to rely on these exclusions in litigation over its indemnity obligation.

It is quite clear that American Guarantee breached its duty to defend—indeed, it does not seem to contend otherwise now. We summarized the law applicable to this issue in Automobile Ins. Co. of Hartford v Cook (7 NY3d 131, 137 [2006]):

“It is well settled that an insurance company’s duty to defend is broader than its duty to indemnify. Indeed, the duty to defend is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false or baseless the suit may be.
“The duty remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered .... Thus, an insurer may be required to defend under the contract even though it may not be required to pay once the litigation has run its course.” (Citations, internal quotation marks, elision and bracketing omitted.)

Here, the complaint in the underlying lawsuit against Daniels unmistakably pleads a claim for legal malpractice. American Guarantee no doubt had reason to be skeptical of the claim; it is unusual, in a loan transaction, for lenders to retain a principal of the borrower to act as their lawyer, as plaintiffs here claimed they did. But that means only that the claim against Daniels may have been “groundless, false or baseless . . . meritless or not covered”—it does not allow American Guarantee to escape its duty to defend. It would be different if the claim were collusive, but American Guarantee has neither claimed that plaintiffs and Daniels were colluding against it nor alleged any facts to support such a claim.

It is also well established that, when an insurer has breached its duty to defend and is called upon to indemnify its insured for a judgment entered against it, the insurer may not assert in its defense grounds that would have defeated the underlying claim against the insured (Lang v Hanover Ins. Co., 3 NY3d 350, 356 [2004]). As the court said in Mendoza v Schlossman (87 AD2d 606, 607 [2d Dept 1982]):

“A default judgment on the issue of liability in a legal malpractice action disposes of the issue of the lawyer’s negligence and the validity of the underlying claim.”

The rule as we have just stated it does not dispose of the present case, because American Guarantee is not relying on defenses that would have shielded Daniels from malpractice liability; it is relying on exclusions in its insurance contract with Daniels. In Lang, however, we stated the rule more broadly:

“[A]n insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment concerning the duty to defend or indemnify the purported insured. If it disclaims and declines to defend in the underlying lawsuit without doing so, it takes the risk that the injured party will obtain a judgment against the purported insured and then seek payment . . . Under those circumstances, having chosen not to participate in the underlying lawsuit, the insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment.” (Emphasis added.)

While Lang did not involve a situation like the one we have here, we now make clear that Lang, at least as it applies to such situations, means what it says: an insurance company that has disclaimed its duty to defend “may litigate only the validity of its disclaimer.” If the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify. This rule will give insurers an incentive to defend the cases they are bound by law to defend, and thus to give insureds the full benefit of their bargain. It would be unfair to insureds, and would promote unnecessary and wasteful litigation, if an insurer, having wrongfully abandoned its insured’s defense, could then require the insured to litigate the effect of policy exclusions on the duty to indemnify.

Perhaps there are exceptions to the rule that we stated in Lang and now reaffirm. Thus, we do not necessarily reject (though we do not necessarily endorse) the decision of the Appellate Division in Hough v USAA Cas. Ins. Co. (93 AD3d 405 [1st Dept 2012]). There, the court held that an insurer’s “disclaimer of its duty to defend its insured in the underlying action does not bar it from asserting that its insured injured plaintiff intentionally.” (Id. at 405.) The Hough decision could arguably be justified on the ground that insurance for one’s own intentional wrongdoing is contrary to public policy (see Messersmith v American Fid. Co., 232 NY 161, 165 [1921]). But no public policy argument is available to American Guarantee here, and there is no reason to make this case an exception to the general rule. American Guarantee, having chosen to breach its duty to defend, cannot rely on policy exclusions to escape its duty to indemnify.

III

The courts below properly dismissed plaintiffs’ claims based on American Guarantee’s alleged bad faith failure to settle the malpractice claim against Daniels for a sum lower than the policy limit.

An insurer’s rejection of a settlement offer for less than the full amount of its policy does not by itself establish the insurer’s bad faith, even when the insured later suffers a judgment greater than the policy limit.

“[A] bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.” (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453-454 [1993].)

Plaintiffs have alleged no facts showing that “bad faith” in this sense was present here. Indeed, nothing in this record suggests that American Guarantee knew or should have known that the malpractice claim against Daniels was worth significantly more than $450,000—let alone more than the $2 million policy limit. As we have mentioned, it may well have been reasonable for American Guarantee to believe that the malpractice claim lacked any merit.

Plaintiffs’ claim in this case is not really for a bad faith failure to settle, but for an alleged bad faith failure to defend. Plaintiffs allege that American Guarantee repudiated its duty to defend without any basis for doing so. We need not decide, however, whether such an allegation could ever support a claim for damages in excess of policy limits. Such a claim would require the insured to show, at a minimum, that the judgment against him would not have been entered if the insurer had defended the case. Plaintiffs have not alleged that that is true here, and they would face an awkward task in making that case: it would require them to prove that the judgment against Daniels that they obtained by default could not have been obtained if Daniels had been defended. They have not alleged this, and therefore their bad faith claims cannot stand.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

Chief Judge Lippman and Judges Graffeo, Read, Pigott and Rivera concur; Judge Abdus-Salaam taking no part.

Order affirmed, without costs.