BP3 Capital, LLC v 5120 Realty Corp.
Attorneys and Parties
Brief Summary
A commercial mortgage foreclosure dispute centered on whether a person who signed loan documents for a corporation had actual or apparent authority to bind the corporation and mortgage its property.
The Supreme Court, Kings County, granted the plaintiff summary judgment on the foreclosure complaint against 5120 Realty Corp., granted an order of reference, denied the corporation's cross-motion under Civil Practice Law and Rules (CPLR) 3025(b) [leave to amend pleadings], appointed a referee, and entered a judgment of foreclosure and sale.
The Appellate Division reversed the judgment of foreclosure and sale, denied the branches of the plaintiff's motion for summary judgment and an order of reference, and granted the corporation leave to amend its answer to add additional affirmative defenses and a counterclaim under Real Property Actions and Proceedings Law (RPAPL) article 15 [action to determine claims to real property].
Although the plaintiff made a prima facie foreclosure showing by producing the mortgage, note, and evidence of default, the corporation raised a triable issue of fact as to whether Wing Fung Chau had apparent authority to execute the loan documents. The record showed the plaintiff relied only on Chau's own representations and documents he supplied, without reasonable further inquiry into his authority. The proposed amended defenses and counterclaim were also not shown to be prejudicial, surprising, palpably insufficient, or patently meritless.
Background
In July 2021, BP3 Capital, LLC sued to foreclose a consolidated mortgage on Brooklyn real property owned by 5120 Realty Corp. The plaintiff alleged that the corporation defaulted on payment obligations. The corporation answered and asserted defenses that Wing Fung Chau, who signed the loan documents, lacked authority to bind the corporation and that required shareholder consents had not been obtained. In July 2022, the plaintiff moved for summary judgment and an order of reference. The corporation opposed and cross-moved under CPLR 3025(b) [leave to amend pleadings] to add further defenses, including lack of actual and apparent authority, lack of corporate approval, failure to investigate Chau's authority, and a counterclaim under RPAPL article 15 [action to determine claims to real property].
Lower Court Decision
The Supreme Court granted the plaintiff's motion for summary judgment on the complaint insofar as asserted against 5120 Realty Corp. and for an order of reference, denied the corporation's cross-motion for leave to amend, appointed a referee to compute the amount due, confirmed the referee's report, and directed the sale of the property in a judgment of foreclosure and sale dated January 22, 2024.
Appellate Division Reversal
The Appellate Division held that the plaintiff's proof established the mortgage, unpaid note, and default, but the corporation's submissions, including affidavits from its president and secretary/vice president, a shareholder agreement, and bylaws, created a factual issue as to whether Chau had apparent authority. The court emphasized that apparent authority must arise from the principal's words or conduct, not the agent's own acts, and that a third party may rely on apparent authority only if its reliance is reasonable. Because the plaintiff relied on bylaws and loan documents supplied by Chau that identified him as sole shareholder and president, yet offered no evidence of any further investigation into his authority, summary judgment was improper. The court also held that leave to amend should have been granted because the plaintiff did not show prejudice or surprise and the proposed amendments were not facially meritless.
Legal Significance
The decision reinforces New York agency law in foreclosure cases: a lender dealing with a purported corporate agent bears the risk of verifying the scope of that person's authority. Apparent authority cannot be created by the agent's own statements or self-generated documents alone. The ruling also underscores the liberal standard for amendment under CPLR 3025(b) [leave to amend pleadings], especially where the opposing party cannot show actual prejudice.
A foreclosure plaintiff cannot obtain summary judgment against a corporate mortgagor when there is evidence that the signatory may have lacked authority and the lender failed to conduct a reasonable inquiry. Courts will also freely permit amendment of pleadings to add authority-based defenses and related real-property claims where the amendments are potentially meritorious and nonprejudicial.