On August 31, 1992, the couple were in the process of buying a home. The husband’s father, a wealthy and successful entrepreneur, decided to help his son, daughter-in-law, and their young children in moving into the home. The husband’s father arranged a $47,000 transfer to the couple through an entity identified as the retirement plan corporation. There is no evidence before this court on how the money was advanced. There is no check from any bank account evidencing the advance of funds from corporation to the couple. At the time the father-in-law advanced the funds, he had the couple sign a mortgage on the house they were acquiring. The interest rate on the mortgage was one per cent.
For five years, the annual payment was never made. There is no evidence that the father-in-law sought payment of the annual amount from his son or daughter-in-law.
In 1997, the couple wanted to move and needed additional funds to do so. In another generous gesture, the husband’s mother advanced an additional $100,000 to her son and daughter-in-law top facilitate their purchase of a second home. The mother-in-law requested that the couple sign a mortgage for $100,000.
On the same day that the mother-in-law advanced the $100,000, the couple also signed a mortgage modification and spreader agreement regarding the first mortgage from the corporation. In that agreement, the couple agreed that the mortgage from the corporation would be transferred from their first home to their new home. The father-in-law signed the document on behalf of the corporation and described himself as the “chairman” of that entity.
Legal counsel said that in 2003, the father-in-law suggested to his son that the first mortgage from the bank should be refinanced for a better interest rate. The parties then sought refinancing but, according to the husband, the bank, in order to grant the lower rate, insisted that the father-in-law be added to the title. In a subsequent deed 4, the husband and wife added the husband’s father to the title to the marital residence. The husband admitted that the couple did not have sufficient income to qualify for any refinancing and that, at that time, his father was paying the first mortgage to the bank. In the text of the deed, the husband and wife conveyed their interest to themselves, and conveyed some interest to the husband’s father. The remainder of the deed then contains the husband’s father’s name and his address. There is no evidence that either the husband or the wife initialed the handwritten material on the front page of the deed. The second page of the deed contains the signatures of the husband and wife, both notarized.
During the time that the couple lived in their first home, neither the couple – nor anyone else – ever paid a penny on the first mortgage to the corporation. During the time that they lived in the second home, no one paid even a farthing on either mortgage. In addition, while living in both homes, the husband’s father paid the bank mortgage on both houses. From the time that they bought their first house until this divorce, the couple did not pay any mortgage to any entity. There is no evidence that this couple ever discussed any mortgages with the husband’s parents from 1992 until the divorce was commenced.
Whatever prompted the parties to ignore the mortgages and the payments required under them, it all changed when the divorce was commenced by the husband in July 2011. In the matrimonial action, the wife moved for temporary support and asserted a claim to the equity in the marital residence.
Almost simultaneously – according to the wife – but only apparently coincidentally- according to the husband – the moribund mortgages which had never been paid by the couple, suddenly came to life. SNP, acting through its counsel, served a notice of acceleration of debt on the note and mortgage on or about December 15, 2011, stating that the couple owed $56,976.74, in monthly unpaid payments, late fees, and the principal balance. Suddenly, competing legal actions mushroomed beside this divorce action. Faced with these threatened foreclosure actions, the wife pre-emptively commenced a third-party action against her in-laws and the corporation.
The complaint also alleged that the deed from the couple to themselves and the father-in-law was invalid because it was not signed before a notary, and because there was no consideration for the transfer. She also asserted that the 2003 deed, granting the father-in-law an interest in the marital residence, should be declared null and void.
The husband’s mother also commenced a foreclosure action, listing her son, daughter-in-law, and her husband as defendants. The wife promptly answered the complaint. Her son never answered and was in default until January 2013. Despite the fact that the husband – his mother’s son – failed to answer the allegations, the mother-in-law never moved for a default judgment against her son on the note and mortgage.
The wife’s answer asserted affirmative defenses that the complaint failed to state a cause of action, the relief was barred by the statute of limitations, and that the wife did not have the capacity to sign the mortgage. In addition, although not set forth in her answer, the wife during her response to the pending motions, claims that the father and mother-in-law failed to comply with CPLR § 3408, which requires certain lenders to engage in settlement conference before the court.
In considering the first prong of the wife’s motion for summary judgment to declare the loan and mortgage null and void, this court notes that there is no evidence that the entity which allegedly loaned this money existed either at the time of the loan or now. There is simply no evidence that SNP ever existed. There is no certificate of incorporation, no evidence of any by-laws, and no evidence of any resolution authorizing any corporate loan to the couple.
In considering the advance of funds from the husband’s mother, the lack of standing, which dooms the claim by the corporation, does not defeat her claim to foreclose. The fact that the mother-in-law cannot discern the source of the funds for the mortgage does not defeat her claim either. On its face, the mortgage is valid and enforceable as a lien against both the husband’s and the wife’s interest in the property.
As a first affirmative defense, the wife argues that these funds, advanced when the couple bought a second house, were in fact a gift to the couple and the gift was only clothed in the note and mortgage to allow the husband’s parents to avoid paying gift taxes. The wife’s argument has a strong visceral appeal. The history of repeated large gifts from the parents to their son and his family clearly raise a strong suspicion that the advance of money to buy a new home, followed by nearly 15 years without any payments and apparent forgiveness – if not forgetfulness – by the husband’s mother militates in favor of a finding that the $100,000, loan was a gift to both the husband and wife.
In considering this defense, the court looks to two theories of analysis. The first is New York’s common law in which the crucial burden of proof rests with the recipient of the funds – the wife in this instance.
Under New York law, the wife, as the party advancing the concept of a gift, must prove three essential elements: donative intent, delivery sufficient to divest the donor of dominion and control over the property, and acceptance.
Under the standards for summary judgment, this court is required to search the record and find some evidence of a donative intent by the mother-in-law to treat the advanced funds as a gift. A review of the deposition testimony, relied on both parties, is equivocal on this question. This court can find no direct evidence that the mother-in-law intended an outright gift at the time the money was advanced. T
In fact, there is circumstantial evidence that the wife knew the $100,000 was advanced to the couple as a loan. The wife signed the loan documents and the mortgage that secured repayment of this putative debt. While the wife alleges that the advanced money was a gift, her actions – signing the note and mortgage – and the uniform sworn testimony by her husband and his parents are some evidence that this advanced money was a loan.
In considering the analysis of whether this intra-family loan is a gift, this court, before drawing a final conclusion, is compelled to also examine the more detailed and discerning analytical framework that has been routinely applied to intra-family financial transactions under the Internal Revenue Code.
In this regard, the tax courts, while evaluating intra-family transactions, have repeatedly held that the existence of loan documents or a written debt instrument, security, or provision for payment of interest are not controlling.
As this analysis indicates, the cases decided under the federal tax code constitute a shift in the burden of proof otherwise applicable under New York’s common law. Under the federal code, an intra-family advance of funds is presumed to be a gift. The burden of proof rests with the party asserting that a loan was advanced and they must prove, by the preponderance of the evidence, that a loan was intended.
In applying this analysis here, the first fact that shades the determination is that the advance of funds, although secured by the mortgage,9 contains an interest rate that is well below market rates. The one percent rate on the note in 1997 was only a small fraction of the market interest rates in 1997.10 In a similar case, the tax court examined a one percent loan and concluded that the significantly-below-market-rate interest demonstrated that the transaction was not intended as a loan
At the moment an interest-free demand loan is made, the transferor has not given up all dominion and control; he could terminate the transferee’s use of the funds by calling the loan. As time passes without a demand for repayment, however, the transferor allows the use of the principal to pass to the transferee, and the gift becomes complete.
Finally, there is no evidence that the husband’s mother treated the advance of funds as a loan. In her deposition, she could not recall the source of the funds she advanced. She kept no records of the loan or any schedule of payments. There is no evidence that she asked her son and daughter-in-law to pay outstanding interest. The mother-in-law never initiated a discussion with the couple about the amounts due under the note and mortgage, either at the time of its advance or at any time until she issued the acceleration notice.
In short, it seems an easy step to conclude that the in-laws had full control over both aspects of the transactions. They advanced the money, they waived any payments on the note, they never discussed the advanced funds with their son or his wife during the 15 years that it was in place, they never mentioned repayment of the loan during this time, and they never gave any indication that they would seek to collect on the note.
This court is perched in the same posture as the federal tax courts. The federal tax courts can not allow a family member to evade the reach of the government’s taxing power by fashioning their own labels to disguise what is otherwise a taxable transaction. Similarly, this court, empowered to achieve equity under both the foreclosure laws and the Domestic Relations Law, cannot allow a parent to disguise a gift as a loan to defeat their daughter-in-law’s claim to equity in the marital residence.
Because this Court grants summary judgment on the wife’s affirmative defense that the advance of funds was a gift and not a loan, this court declines to consider the remaining defenses asserted by the wife. In addition, this court notes that while the note and mortgage are determined to be unenforceable against the wife, the ultimate question of its validity may be mooted through application of the Domestic Relations Law. Equitable distribution does not require this court to divide the note and mortgage evenly between the husband and wife, or require the wife to repay any portion of the loan or dictate that the mortgage reduce the wife’s share of the equity in the principal residence.
Family cases involving delicate issues should be referred to lawyers, who, by reason of their experience, will be able to address these issues. Contact Stephen Bilkis and Associates to ensure your rights are protected.