## Facts

- 364 N.B.E. Corp. (N.B.E.) owned and developed a commercial condominium building at 364 Myrtle Avenue in Brooklyn, New York.
- N.B.E. borrowed approximately $1.45 million from Edge Capital, LLC and related parties (later including JA Funding, Inc.) to finance the project, and the debt was secured by mortgages on the property.
- After N.B.E. defaulted, the parties entered into workout arrangements more than once, but N.B.E. again failed to meet its payment obligations.
- The creditors commenced a foreclosure action in New York state court.
- In June 2010, the parties resolved the foreclosure action by stipulation. N.B.E. acknowledged the debt had grown to about $1.8 million.
- As part of the stipulation, N.B.E. executed a deed in lieu of foreclosure (the DIL deed) and delivered it to an escrow agent to be held “as security” for N.B.E.’s obligations.
- The stipulation provided that, if N.B.E. defaulted again, the escrow agent would release the DIL deed to the creditors and the creditors could record it; the stipulation also stated that N.B.E. retained a right to redeem the property by curing defaults.
- N.B.E. defaulted again. Without commencing a new foreclosure proceeding, the creditors obtained the DIL deed from escrow and recorded it, then asserted they had acquired title.
- When N.B.E. later attempted to tender the arrears to cure the default, the creditors rejected the payment and maintained that the recorded DIL deed ended N.B.E.’s ownership.
- N.B.E. filed a Chapter 11 case and commenced an adversary proceeding seeking, among other relief, a declaration that the stipulation/DIL deed operated as a mortgage under N.Y. Real Property Law (RPL) § 320 and therefore could be enforced only through foreclosure.
- N.B.E. moved for summary judgment on the claim that the DIL deed and stipulation should be treated as a mortgage; the creditors opposed and sought judgment in their favor.

## Issues

1. Whether the DIL deed and the stipulation—despite being styled as a deed in lieu—were intended “as security” and therefore must be treated as a mortgage under N.Y. RPL § 320.
2. If the arrangement was a mortgage, whether the creditors could obtain title and cut off N.B.E.’s redemption rights by recording the escrowed deed without a foreclosure proceeding.

## Decision

- The court granted summary judgment for N.B.E. on its claim under N.Y. RPL § 320.
- The court held that the escrowed DIL deed was not a true conveyance transferring title, but functioned as security for an ongoing debt, making it the equivalent of a mortgage under § 320.
- Because the instrument was treated as a mortgage, N.B.E. retained an equity of redemption; the creditors could not terminate that right or obtain title by recording the escrowed deed without following New York foreclosure procedures.
- Having resolved the dispute on the § 320 theory, the court did not need to reach alternative avoidance theories to provide the requested declaratory relief.

## Legal Principles

- Under N.Y. RPL § 320, an instrument that appears to be an absolute conveyance will be treated as a mortgage when, in purpose and effect, it is given as security for the payment of money.
- Courts look to the substance of the arrangement and the parties’ expressed terms, including whether the deed was delivered into escrow as collateral in an ongoing debtor-creditor relationship.
- A reserved right to redeem by curing defaults is consistent with a mortgage relationship and inconsistent with a completed transfer of title by deed in lieu.
- A mortgagor’s equity of redemption cannot be eliminated by a contemporaneous agreement that allows a lender to obtain ownership of the property upon default without foreclosure.
- Recording a deed that is treated as a mortgage does not, by itself, transfer title or substitute for a foreclosure judgment and sale.

## Conclusion

In In re 364 N.B.E. Corp., the bankruptcy court held that a deed in lieu deposited in escrow “as security,” coupled with a stated right to redeem, operated as a mortgage under N.Y. RPL § 320; therefore, the creditors’ recordation of the escrowed deed did not transfer title or extinguish the debtor’s equity of redemption, and the creditors were required to proceed through foreclosure to obtain ownership.


In re 364 N.B.E. Corp., 2015 WL 9581323 (2015)