New York Court Invalidates Mortgage to Church for Failure to Comply with the Religious Corporations Law

The New York Supreme Court, Kings County recently dismissed a lender’s foreclosure action against a church and determined that the mortgage was invalid because the mortgage did not comply with the Religious Corporations Law (“RCL”).  See John T. Walsh Enterprises, LLC v. Grace Christian Church, 62 Misc. 3d 1224(A) (N.Y. Sup. Ct. 2019).  In 2007, the defendant church executed a mortgage to plaintiff lender to secure a $350,000 loan.  The note required monthly payments for one year until the entire debt would become due, with the option to extend the duration for another year in exchange for a renewal fee.  The note also called for a 16% contract rate of interest and 24% default rate.  After defendant failed to pay the full amount due on the maturity date, plaintiff brought this action.  Although the procedural history is convoluted, in 2018, the Court vacated a previously-issued order granting plaintiff summary judgment and restored the motion to its calendar.  Defendant cross-moved to dismiss the complaint because, among other things, defendant’s congregation did not approve the transaction (as required under RCL § 200) and defendant did not obtain leave of the court or attorney general for the mortgage (as required under RCL § 12(1)).  Although there was no dispute that defendant did not obtain leave of the court or attorney general, plaintiff sought to have the mortgage retroactively confirmed pursuant to RCL § 12(9). 

The Court granted defendant’s motion and dismissed the action.  The Court applied the Second Department’s two-part test to ratify a mortgage under RCL § 12(9), which requires the Court to determine: (i) that the terms and consideration of the transaction were not unwise; and (ii) that the transaction would benefit the corporation or that the best interests of its members would be promoted thereby.  See Church of God of Prospect Plaza v. Fourth Church of Christ, Scientist, of Brooklyn, 76 A.D.2d 712 (2d Dept. 1980).  With regard to the first prong, the Court found that although defendant needed the loan proceeds to pay certain expenses and to act as a bridge until defendant could find other refinancing, “the probability that refinancing would have been readily available in the one or two years following closing cannot be determined from the record. If a sensible refinancing option was not realistic, the subject mortgage loan was doomed to failure as defendant faced the obligation to make a substantial balloon payment on the maturity date[.]”  Additionally, the Court expressed “concern” about defendant’s allegation that plaintiff had unilaterally increased the loan amount from $300,000 to $350,000 at the closing.  With regard to the second prong, “it is clear that nunc pro tunc approval of a $350,000 mortgage with a 16% rate of interest and default interest rate of 24%, upon which it was previously determined that the amount of indebtedness due and owing as of November 30, 2017 exceeded one million dollars, would not be in defendant’s best interest as it will likely result in the loss of its house of worship in foreclosure.”  Accordingly, the Court deemed the mortgage invalid and dismissed the complaint, albeit leaving the door open for plaintiff to bring an action on the note. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.