## Facts

- A purchaser bought real property from the seller using a wraparound mortgage structure, under which the buyer’s note and mortgage to the seller “wrapped” an existing senior mortgage held by a third-party lender.
- The wraparound mortgage made the seller the holder of the junior mortgage while the seller remained responsible for making payments on the senior mortgage.
- The wraparound mortgage expressly granted the buyer a prepayment privilege permitting payment of the entire remaining balance before maturity.
- The buyer exercised the prepayment right and tendered full payment to the seller under the wraparound mortgage.
- After accepting or receiving the buyer’s prepayment, the seller refused to satisfy or pay off the existing senior mortgage held by the third-party lender.
- The buyer sought judicial relief to determine whether the seller was obligated, upon full prepayment, to discharge the senior mortgage so the property would no longer remain encumbered by that prior lien.

## Issues

1. Whether a prepayment privilege in a wraparound mortgage impliedly obligates the seller–mortgagee to satisfy the underlying senior mortgage upon the buyer’s full prepayment.
2. Whether declaratory judgment relief is appropriate to define the parties’ obligations concerning discharge of the senior mortgage after the buyer tenders full prepayment under the wraparound agreement.

## Decision

- The Appellate Division affirmed the judgment in the buyer’s favor.
- The court held that the prepayment provision, read in the context of a wraparound mortgage transaction, created an implied obligation requiring the seller to satisfy the senior mortgage upon the buyer’s full prepayment.
- The court upheld declaratory relief clarifying that, after the buyer’s prepayment, the seller must discharge the senior lien so the buyer receives the benefit of prepaying the wraparound debt.

## Legal Principles

- Under New York contract interpretation, a written agreement may include implied obligations necessary to give the contract practical effect and to carry out the parties’ reasonable expectations.
- In wraparound mortgage transactions, a prepayment right may imply that the buyer’s full prepayment is intended to result in the seller applying funds so the property is not left encumbered by the senior mortgage.
- A contract provision is construed in the setting of the overall transaction; a prepayment clause is not treated as an isolated term when doing so would defeat the commercial purpose of the agreement.
- Courts may grant declaratory judgment to resolve an actual dispute over the parties’ rights and duties under mortgage financing documents, including obligations related to satisfaction of senior liens.

## Conclusion

The court affirmed a declaration that, when a buyer fully prepays a wraparound mortgage pursuant to an express prepayment privilege, the seller is impliedly required to satisfy the underlying senior mortgage, because any contrary reading would defeat the function of prepayment within the wraparound arrangement and leave the buyer with a paid-off wraparound debt but a continuing senior encumbrance.


Carroll v. Miller, 166 A.D.2d 492, 561 N.Y.S.2d 47 (N.Y. App. Div. 2d Dep’t 1990)