                           State of New York
                    Supreme Court, Appellate Division
                        Third Judicial Department
Decided and Entered: February 23, 2017                    522480
________________________________

MARILYN KRUPNICK,
                     Appellant,
     v

WINDY RIDGE CORP. et al.,
                    Defendants,
      and                                    MEMORANDUM AND ORDER

ROBERT KALLMAN,
                     Respondent.

GREGORY J. ALLEN, as Receiver
   for WINDAY RIDGE CORP.,
                    Respondent.
________________________________


Calendar Date:    January 10, 2017

Before:    Garry, J.P., Rose, Devine, Clark and Mulvey, JJ.

                              __________


      Schiller, Knapp, Lefkowitz & Hertzel, LLP, Latham (Gregory
J. Sanda of counsel), for appellant.

      Greg D. Lubow, Tannersville, for Robert Kallman,
respondent.

      Freeman Howard, PC, Hudson (Paul M. Freeman of counsel),
for Gregory J. Allen, respondent.

                              __________


Rose, J.

      Appeal from an amended order of the Supreme Court
(McDonough, J.), entered February 4, 2016 in Greene County, which
granted a motion by the receiver for defendant Windy Ridge Corp.
                              -2-                522480

to, among other things, permit a sale of the property and mandate
plaintiff's discharge of the mortgage.

      In 2003, defendant Robert Kallman and Sheldon Krupnick,
plaintiff's husband, borrowed funds from plaintiff to finance
their purchase of all of the capital stock in defendant Windy
Ridge Corp.1 Kallman and Krupnick, in their capacity as the sole
members of Windy Ridge, executed a promissory note that obligated
Windy Ridge to repay the loan. To secure payment of the note,
they also executed a mortgage on all of the real property owned
by Windy Ridge in the Town of Windham, Greene County, and
personally guaranteed the note. After Windy Ridge failed to make
payment, plaintiff commenced this action against Windy Ridge and
Kallman to, among others, foreclose the mortgage and obtain a
deficiency judgment. Issue was joined and, in 2011, plaintiff
moved for summary judgment. Kallman then cross-moved for summary
judgment dismissing the complaint, alleging that he was
fraudulently induced to execute the note, mortgage and personal
guarantee.

      Shortly thereafter, Kallman commenced a separate proceeding
to judicially dissolve Windy Ridge (see Business Corporation Law
§ 1104-a). Supreme Court granted the petition, appointed a
receiver in that proceeding to supervise the winding up of Windy
Ridge's assets, including the real property that is the subject
of this foreclosure action, and stayed this action (see Business
Corporation Law §§ 1008 [a] [9]; 1115 [a] [3]). Four years
later, in 2015, the receiver entered into a contract to sell all
of Windy Ridge's assets. After plaintiff sent the receiver a
payoff letter indicating that she was owed $460,819.76, the
receiver moved in this action for an order directing that, upon
the closing of title to Windy Ridge's real property, he is to
deliver to plaintiff's attorney $480,819.76 (the payoff amount of


    1
        Kallman had previously commenced an action against
Krupnick to rescind the contract for the Windy Ridge stock
purchase. In that action, we found, among other things, that
Kallman's conduct "constituted unclean hands barring the
equitable relief" of rescission (Kallman v Krupnick, 67 AD3d
1093, 1097 [2009], lv denied 14 NY3d 703 [2010]).
                              -3-                522480

$460,819.76, plus $20,000 as an estimated amount of accruing
interest) to be held in the attorney's escrow account and, upon
such payment, directing the Greene County Clerk to, among other
things, discharge plaintiff's mortgage. Although the mortgage
would then be discharged, thereby allowing the receiver to
transfer title, the funds would remain in the escrow account of
plaintiff's attorney until further direction of the court after
its determination of the long-pending summary judgment motions.
Supreme Court granted the receiver's motion in full and provided,
among other things, that the payment into the attorney's escrow
account constituted "substitute collateral" for the mortgage.
Plaintiff now appeals.

      We agree with plaintiff that Supreme Court lacked the
authority to grant the relief requested by the receiver. It is
well settled that "a foreclosure action is a 'proceeding in a
court of equity which is regulated by statute'" (Jo Ann Homes at
Bellmore v Dworetz, 25 NY2d 112, 122 [1969], quoting Dudley v
Congregation of Third Order of St. Francis, 138 NY 451, 457
[1893]). Here, Supreme Court erroneously relied on RPAPL 1921 as
authority for directing the County Clerk to mark the mortgage as
"discharged" upon proof of payment into the escrow account.
While the RPAPL provides "a mortgagor or other interested party
with a statutory remedy for obtaining a satisfaction of mortgage"
(Merrill Lynch Equity Mgt. v Kleinman, 246 AD2d 884, 886 [1998],
lv denied 92 NY2d 802 [1998]), the condition precedent to
receiving a discharge is that full "payment of authorized
principal, interest and any other amounts due thereunder or
otherwise owed by law has actually been made" (RPAPL 1921 [1]
[emphasis added]; see Farmingdale Realty Trust v Real Props. MLP
Ltd. Partnership, 225 AD2d 656, 657-658 [1996]; Weiss v Weiss,
206 AD2d 741, 743 [1994]). In our view, the receiver's deposit
of the money into the escrow account of plaintiff's attorney
falls short of full payment actually made to plaintiff because,
even assuming that $480,819.76 represents the actual dollar
amount of the loan plus interest owed to plaintiff, payment to
plaintiff is contingent upon the occurrence of a later event,
namely, Supreme Court's determination of the long-pending summary
                                 -4-                522480

judgment motions.2 Thus, we find that RPAPL 1921 did not provide
Supreme Court with the authority to direct the County Clerk to
mark the mortgage as discharged of record.

      Moreover, we are unpersuaded by the receiver's contention
that UCC 9-313 permits Supreme Court to direct that the escrowed
funds would constitute substitute collateral for the mortgage.
UCC 9-313 merely provides that a security interest is perfected
when a secured party takes possession of the collateral. It does
not authorize Supreme Court to substitute plaintiff's collateral
in the first instance and, as we have said, payment into the
escrow account under the conditions imposed here is not
tantamount to possession of the collateral by plaintiff (see UCC
9-313 [a]).

      Finally, there is no merit to the receiver's assertion that
Business Corporation Law § 1206 gives him the same power that a
trustee in bankruptcy has under chapter 7 of the Bankruptcy Code
to dispose of real property free and clear of all liens and
mortgages. In short, Supreme Court lacked the equitable
authority to fashion the remedy at issue. The parties' remaining
contentions have been considered and found to be without merit.

         Garry, J.P., Devine, Clark and Mulvey, JJ., concur.




     2
        Even then, this action is unlikely to be finally resolved
given the history of litigation between these parties.
                              -5-                  522480

      ORDERED that the amended order is reversed, on the law,
without costs, and motion denied.




                             ENTER:




                             Robert D. Mayberger
                             Clerk of the Court
