PHELPS, GEORGE R. v. PHELPS, LISA B.

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
1437/14
CA 14-01056
PRESENT: SCUDDER, P.J., CENTRA, CARNI, AND SCONIERS, JJ.
GEORGE R. PHELPS, PLAINTIFF,
V MEMORANDUM AND ORDER
LISA B. PHELPS, DEFENDANT.
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LISA B. PHELPS, THIRD-PARTY
PLAINTIFF-RESPONDENT,
V
STANFORD N. PHELPS, ELIZABETH R. PHELPS AND
S.N.P. ASSOCIATES RETIREMENT PLAN, INC.,
THIRD-PARTY DEFENDANTS-APPELLANTS.
(ACTION NO. 1.)
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ELIZABETH R. PHELPS, PLAINTIFF-APPELLANT,
V
GEORGE R. PHELPS, STANFORD N. PHELPS,
DEFENDANTS-APPELLANTS,
LISA B. PHELPS, DEFENDANT-RESPONDENT,
AND CAPITAL ONE BANK (USA) N.A., DEFENDANT.
(ACTION NO. 2.)
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S.N.P. ASSOCIATES RETIREMENT PLAN, INC.,
PLAINTIFF-APPELLANT,
V
GEORGE R. PHELPS, STANFORD N. PHELPS,
DEFENDANTS-APPELLANTS,
LISA B. PHELPS, DEFENDANT-RESPONDENT,
AND CAPITAL ONE BANK (USA) N.A., DEFENDANT.
(ACTION NO. 3.)
NIXON PEABODY LLP, ROCHESTER (DAVID H. TENNANT OF COUNSEL), FOR
PLAINTIFF-APPELLANT ELIZABETH R. PHELPS, DEFENDANT-APPELLANT STANFORD
N. PHELPS AND THIRD-PARTY DEFENDANTS-APPELLANTS.
DAVIDSON FINK LLP, ROCHESTER (DONALD A. WHITE OF COUNSEL), FOR
DEFENDANT-APPELLANT GEORGE R. PHELPS.
INCLIMA LAW FIRM, PLLC, ROCHESTER (CHARLES P. INCLIMA OF COUNSEL), FOR
-2- 1437/14
CA 14-01056
THIRD-PARTY PLAINTIFF-RESPONDENT AND DEFENDANT-RESPONDENT.
Appeals from a judgment (denominated order) of the Supreme Court,
Monroe County (Richard A. Dollinger, A.J.), entered January 14, 2014.
The judgment, among other things, granted the motion of Lisa B. Phelps
for summary judgment.
It is hereby ORDERED that the judgment so appealed from is
unanimously modified on the law by denying that part of the motion of
third-party plaintiff-defendant Lisa B. Phelps seeking a declaration
in action No. 1 that a mortgage instrument executed in 1997 is null
and void and by reinstating the complaint in action No. 2, and as
modified the judgment is affirmed without costs.
Memorandum: George R. Phelps, plaintiff in action No. 1, and
Lisa B. Phelps, defendant in action No. 1, were married in 1991. In
2011, George R. Phelps initiated a divorce action. Lisa B. Phelps
thereafter commenced a third-party action against her husband’s
parents, Stanford N. Phelps and Elizabeth R. Phelps, and S.N.P.
Associates Retirement Plan, Inc. (collectively, third-party
defendants), seeking, inter alia, a declaration that two intra-family
transactions alleged by third-party defendants to be loans made to
George R. Phelps and Lisa B. Phelps, secured by mortgages on the
marital residence, were actually gifts. One alleged loan was made in
1992 by S.N.P. Associates Retirement Plan, Inc. (hereafter, SNP). The
other alleged loan was made by Elizabeth R. Phelps in 1997.
Elizabeth R. Phelps thereafter commenced an action against George
R. Phelps, Lisa B. Phelps, Stanford N. Phelps and Capital One Bank,
(USA), N.A. (Capital One), to foreclose the mortgages securing the
1997 alleged loan (action No. 2), and SNP did the same with respect to
the mortgage securing the 1992 alleged loan (action No. 3). Capital
One was named in both of those actions as a subordinate judgment
lienholder.
Following discovery, Elizabeth R. Phelps moved for summary
judgment seeking a judgment of foreclosure in action No. 2, and Lisa
B. Phelps thereafter moved for summary judgment on the third-party
complaint in action No. 1 declaring that the mortgages are null and
void and for summary judgment dismissing the complaint against her in
action Nos. 2 and 3. Supreme Court denied the motion of Elizabeth R.
Phelps in action No. 2 and granted the motion of Lisa B. Phelps in
action No. 1, declaring that the funds advanced to her by Elizabeth R.
Phelps were a gift and thus that the mortgage instrument executed in
1997 is null and void as against her interest in the marital
residence, and the court therefore dismissed the complaint in action
No. 2 against her. In action No. 3, the court declared the mortgage
instrument executed in 1992 to be null and void as against the
interest of Lisa B. Phelps in the marital residence and dismissed
SNP’s complaint in its entirety on the ground that SNP was a
nonexistent corporation and therefore lacked “standing” to commence
action No. 3.
-3- 1437/14
CA 14-01056
In these consolidated appeals, Elizabeth R. Phelps, Stanford N.
Phelps and SNP appeal from the order in all three actions. George
Phelps appeals with respect to the order in action Nos. 2 and 3.
We reject the contention of SNP, Stanford N. Phelps, George R.
Phelps and Elizabeth R. Phelps with respect to action No. 3 that the
court erred in concluding that SNP had no corporate existence and
therefore lacked capacity, denominated “standing” by the court, to
sue. Counsel for SNP correctly concedes that, in opposition to the
motion of Lisa B. Phelps, no evidence was produced of any corporate
formation or existence of “S.N.P. Associates Retirement Plan, Inc.” at
the time of the alleged mortgage loan, or at any time thereafter.
Therefore, on this record we conclude that, at the time of the
execution of the mortgage, SNP was at best a “purported entity” that
could not acquire rights by contract or otherwise, or sue or be sued
(Kiamesha Dev. Corp. v Guild Props., 4 NY2d 378, 389; see 442 Decatur
St., LLC v Spheres Realty, Inc., 14 AD3d 535, 535-536). Inasmuch as
SNP failed to make a motion to reform the pleadings to identify
Stanford N. Phelps as the alleged real party in interest and did not
make such argument in its opposition papers to the motion, SNP’s
contention in this respect is not preserved for our review (see
generally Cavalry Invs., LLC v Kass, 19 Misc 3d 128[A], *1).
We agree, however, with Stanford N. Phelps, George R. Phelps and
Elizabeth R. Phelps that, with respect to actions Nos. 2 and 3, the
court erred in applying burden-shifting and substantive principles
developed under Federal Tax Law, rather than New York common law, to
conclude that the intra-family transactions at issue were gifts rather
than bona fide and enforceable loan and mortgage transactions. “It is
axiomatic that Supreme Court is bound to apply the law as promulgated
by the Appellate Division within its particular Judicial Department
(McKinney’s Cons Laws of NY, Book 1, Statutes § 72 [b]), and where the
issue has not been addressed within the Department, Supreme Court is
bound by the doctrine of stare decisis to apply precedent established
in another Department, either until a contrary rule is established by
the Appellate Division in its own Department or by the Court of
Appeals” (D’Alessandro v Carro, 123 AD3d 1, 6; see Mountain View Coach
Lines v Storms, 102 AD2d 663, 664-665). In contrast to the burden-
shifting approach under Federal Tax Law principles, it is well settled
under the common law of this State that a party claiming that a
transfer is a gift has the burden of proof by clear and convincing
evidence that the gift was made with the requisite donative intent
(see Gruen v Gruen, 68 NY2d 48, 53; Matter of Abramowitz, 38 AD2d 387,
392-393, affd 32 NY2d 654; Matter of Rinchiuso, 20 AD2d 254, 255-256).
Applying the above principles, we conclude that the court
properly denied the motion for summary judgment of Elizabeth R. Phelps
in action No. 2 but erred in granting that part of the motion for
summary judgment of Lisa B. Phelps in action No. 1 declaring that the
1997 alleged loan and mortgage instrument was null and void as against
her and, in action No. 2, dismissing the complaint against her. We
therefore modify the judgment accordingly. We conclude that, in
action No. 2, Elizabeth R. Phelps established the presumptive validity
of the 1997 mortgage instrument (see Artigas v Renewal Arts Realty
-4- 1437/14
CA 14-01056
Corp., 22 AD3d 327, 328); however, the submissions of Lisa B. Phelps,
in support of her own motion and in opposition to that of Elizabeth R.
Phelps, raised issues of fact whether the 1997 loan and mortgage
documents were part of a “sham” transaction in which the alleged loan
was never intended to be repaid (see Dayan v Yurkowski, 238 AD2d 541,
541-542; Lombard & Co. v De La Roche, 235 AD2d 333, 334; Paolangeli v
Cowles, 208 AD2d 1174, 1175; see also Bernstein v Kritzer, 253 NY 410,
416-417). We further conclude that, even assuming, arguendo, that
Lisa B. Phelps established her entitlement to judgment in action No. 1
that the purported loan was a gift, third-party defendants and George
R. Phelps raised issues of fact sufficient to defeat the motion (see
generally Zuckerman v City of New York, 49 NY2d 557, 562).
Entered: May 8, 2015 Frances E. Cafarell
Clerk of the Court