Federal National Mortgage Association v. 245 Sullivan Ave LLC

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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FEDERAL NATIONAL MORTAGE ASSOCIATION, :

:

Plaintiff, :

: MEMORANDUM & ORDER

-against- : 24-cv-2868 (DLI)(LKE)

:

245 SULLIVAN AVE LLC, MOSES NEUMAN, SOLOMON :

STEINMETZ, the NEW YORK CITY ENVIRONMENTAL :

CONTROL BOARD and JOHN DOE #1 THROUGH JOHN :

DOE #40, inclusive, the names of the last 40 defendants being :

fictitious, the true names of said defendants being unknown to :

plaintiff, it being intended to designate any occupants or tenants :

of the mortgaged premises who are in default in the payment of :

rent for which a proceeding is now pending by the mortgagor :

and/or other persons or parties having or claiming an interest in :

or lien upon the mortgaged premises subordinate to that of the :

mortgagee, if the aforesaid individual defendants are living, and :

if any or all of said individual defendants be dead, their heirs at :

law, next of kin, distributes, executors, administrators, trustees, :

committees, devisees, legatees and the assignees, lienors, :

creditors, successors in interest of them, and generally all :

persons having or claiming under, by, through or against the :

said defendants named as a class, any right, title or interest in or :

lien upon the premises described in the complaint herein, :

:

Defendants. :

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DORA L. IRIZARRY, United States District Judge:

On April 17, 2024, Federal National Mortgage Association (“Plaintiff”) initiated this

foreclosure action against 245 Sullivan Ave LLC (“245 Sullivan”), Moses Neuman, Solomon

Steinmetz, the New York City Environmental Control Board, and John Does #1-40 (collectively,

“Defendants”).1 Compl., Dkt. Entry No. 1. Plaintiff seeks to foreclose on Defendants’ mortgage

1 Defendants John Does #1-40 are unknown individuals or entities joined because Plaintiff believes they “may be

tenants and persons in possession of the Property or have some interest in and to the Property . . . inferior and

subordinate to that of Plaintiff or may be persons who hold or have collected the rents, issues and profits relating to

or arising from the Property.” Compl. ¶ 9.

on an apartment building located at 245 Sullivan Avenue, Brooklyn, New York (“Property”).

Compl. ¶ 1. On June 14, 2024, Defendants 245 Sullivan, Mr. Neuman, and Mr. Steinmetz (the

“245 Sullivan Defendants”) answered the Complaint, asserting affirmative defenses and a

counterclaim. Answer and Counterclaim, Dkt. Entry No. 17 (“Counterclaim”). The Counterclaim

seeks rescission of a Multifamily Loan and Security Agreement (“Loan Agreement”) between 245

Sullivan and Plaintiff’s predecessor mortgagee, Greystone Servicing Company LLC

(“Greystone”) due to alleged mutual mistake. Counterclaim ¶¶ 40-46. Notably, the 245 Sullivan

Defendants also plead mutual mistake as an affirmative defense. Id.

Plaintiff moved to dismiss the Counterclaim arguing that it fails to: (1) plead mistake with

particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure (“Rules”); and

(2) state a claim pursuant to Rule 12(b)(6). Mot. Dismiss, Dkt. Entry No. 25. Defendants opposed

the motion. Opp’n, Dkt. Entry No. 29. Plaintiff replied. Reply, Dkt. Entry No. 31. For the reasons

set forth below, Plaintiff’s motion to dismiss the Counterclaim is granted.

BACKGROUND2

In 2015, the 245 Sullivan Defendants purchased the Property, which was comprised of

“seriously deteriorated” rent stabilized units. Counterclaim ¶ 40. According to the Counterclaim,

they could afford to purchase and renovate the Property only if the Division of Housing and

Community Renewal of the New York State Homes and Community Renewal agency (“DHCR”)

exempted it from rent regulation. Id. ¶ 41. As such, 245 Sullivan applied to DHCR for the

exemption representing that the Property would be “substantially rehabilitated.” Id. Defendants

2 The facts below are taken from the Complaint and Counterclaim and any incorporated documents of which Plaintiffs

should be aware or should possess. They are accepted as true as required at this stage of the case. . LaFaro v. N.Y.

Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009) (citation omitted).

allegedly were “assured by those assisting with the [exemption] application . . . that the application

would be approved by DHCR.” Id.

The 245 Sullivan Defendants purportedly substantially rehabilitated the Property and,

based on the alleged assurances from unnamed individuals, executed leases with new tenants at

market rates significantly higher than the rent stabilized rates. Id. 245 Sullivan also applied to

Greystone for a mortgage in the amount of $10,725,000.00 and provided Greystone with the

Property’s income projections based on the new market rent rates. Id. ¶ 42. Greystone approved

the loan application, allegedly “kn[owing] that [245 Sullivan] would only be capable of making

the monthly debt service payments on the Loan Agreement if [its] application to [DHCR] was

approved and the tenants continued paying rent at the agreed upon market rate.” Id.

DHCR then denied 245 Sullivan’s exemption application and advised the Property’s

tenants that their rent obligations would be reduced in accord with “rent stabilization guidelines.”

Id. ¶ 44. This “drastic decrease in rental income” caused 245 Sullivan to cease its mortgage

payments. Id. ¶ 45. This litigation ensued.

LEGAL STANDARD

To survive a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a

complaint or counterclaim must “state a claim to relief that is plausible on its face.” Bell Atl. Corp.

v. Twombly, 550 U.S. 544, 570 (2007). The plausibility standard “does not require ‘detailed factual

allegations,’ but it demands more than . . . unadorned, the-defendant-unlawfully-harmed-me

accusation[s].” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555).

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court accepts as true all well

pled factual allegations and draws all reasonable inferences in the claimant’s favor. LaFaro v.

N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009) (citation omitted).

Nevertheless, “threadbare recitals of the elements of a cause of action” supported by “conclusory”

statements and mere speculation are inadequate claims subject to dismissal. Chavis v. Chappius,

618 F.3d 162, 170 (2d Cir. 2010) (internal quotation marks and citation omitted); See, Iqbal, 556

U.S. at 678 (“[T]he tenet that a court must accept as true all of the allegations contained in a

complaint [or counterclaim] is inapplicable to legal conclusions.”).

For claims of mistake, Rule 9(b) builds on Rule 12(b)(6) and establishes heightened

pleading standards. In particular, Rule 9(b) provides that “a party must state with particularity the

circumstances constituting fraud or mistake.” Fed. R. Civ. P. Rule 9(b). However, “[m]alice,

intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Id.

“[A]llegations . . . which fail to specify the time, place, speaker, and sometimes even the content

of the alleged misrepresentations, lack the ‘particulars’ required by Rule 9(b).” Luce v. Edelstein,

802 F.2d 49, 54 (2d Cir. 1986); See also, Mills v. Everest Reinsurance Co., 410 F. Supp.2d 243,

248 (S.D.N.Y. 2006) (applying this standard to a claim of mutual mistake). The purpose of Rule

9(b) is to “afford defendant[s] fair notice of [claimant’s] claim and the factual ground upon which

it is based.” Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990).

DISCUSSION

The seven paragraph Counterclaim rests on just two factual allegations: (1) Greystone

approved the Loan Agreement “based on the income projections of the Property with the market

rate rental payments”; and (2) Greystone knew that it “would only be capable of making the

monthly debt service payments on the Loan Agreement if [245 Sullivan’s] application to have the

Mortgage Property exempted from rent regulation was approved and the tenants continued paying

rent at the agreed upon market rate.” Counterclaim ¶ 42.

This Counterclaim lacks the “particularity” required by Rule 9(b). While baldly stating

that 245 Sullivan received “assurances,” the Counterclaim does not allege when or from whom

they received assurances about their rent stabilization exemption or that Greystone was so

informed. Moreover, the allegation that they “were assured by those assisting with the

application” is vague. Id. at ¶ 41 (emphasis added). The Counterclaim does not specify to whom

this refers, which could include 245 Sullivan’s own advisors as opposed to DHCR or any other

entity or person. The 245 Sullivan Defendants do not specify when they applied for the Loan

Agreement, when it was approved, or when DHCR denied their application. Moreover, to the

extent that they intended to allege that DHCR employees did make the alleged assurances, the

Counterclaim contains no specific information regarding those assurances. In fact, it is so

barebones that the very nature of the purported mutual mistake is unclear. Accordingly, the Court

finds that the 245 Sullivan Defendants failed to plead facts with the required specificity to comply

with Rule 9(b). See, Luce, 802 F.2d at 54-55 (dismissing claims pursuant to 9(b) where plaintiffs

failed to state details or particular facts to support their allegations).

Even if the 245 Sullivan Defendants had met Rule 9(b)’s heightened pleading standard,

they failed to state a claim for rescission based on mutual mistake that satisfies Rule 12(b)(6).

Under New York law, “an agreement may be subject to rescission . . . based on a mutual mistake

by the parties.” Simkin v. Blank, 19 N.Y.3d 46, 52 (2012). “A ‘mutual mistake’ occurs when

‘both . . . parties to a bilateral transaction share the same erroneous belief and their acts do not in

fact accomplish their mutual intent.’” Creative Waste Mgmt., Inc. v. Capitol Env't Servs., Inc.,

429 F. Supp.2d 582, 608 (S.D.N.Y.), supplemented, 458 F. Supp.2d 178 (S.D.N.Y. 2006) (quoting

Healy v. Rich Prods. Corp., 981 F.2d 68, 73 (2d Cir. 1992)) (quoting 21 N.Y. Jur.2d Contracts §

121 (1982)). To support recission, the mutual mistake “must be so material that it goes to the

foundation of the agreement.” BP Prods. N. Am. Inc. v. Blue Hills Fuels, LLC, 2022 WL

16540804, at *4 (S.D.N.Y. Oct. 28, 2022) (quoting Simkin, 19 N.Y. 3d at 52) (internal quotations

omitted). Therefore, court ordered relief is appropriate only in “exceptional situations.” Id.

(quoting Da Silva v. Musso, 53 N.Y.2d 543, 552 (1981)).

As stated above, the Counterclaim does not identify explicitly the purported mutual

mistake, let alone clarify how such a mistake meets the remaining elements of the claim.

Defendants do not allege that Greystone was aware of the alleged assurances. Therefore, mutual

mistake only could be plausible if the facts alleged showed that, at the time they entered into the

Loan Agreement, both parties believed: (1) Defendants’ exemption application would be granted,

or (2) market rate rents would remain in place. However, either alleged mistake would be merely

an “erroneous ‘prediction or judgment as to events to occur in the future,’” which “does not, as a

matter of [New York] law, constitute a mutual mistake.” E.g., Trireme Energy Holdings, Inc. v.

Innogy Renewables US LLC, 2021 WL 3668092, at *14 (S.D.N.Y. Aug. 17, 2021) (quoting

Hartford Fire Ins. Co. v. Federated Dep’t Stores, Inc., 723 F. Supp. 976, 991 (S.D.N.Y. 1989)).

CONCLUSION

For the reasons stated above, Plaintiff’s motion to dismiss Defendant’s Counterclaim is

granted without prejudice.3

SO ORDERED.

Dated: Brooklyn, New York

March 18, 2025

/s/

DORA L. IRIZARRY

United States District Judge

3 As stated above, the 245 Sullivan Defendants plead rescission based on mutual mistake as both an affirmative defense

and a counterclaim. Here, while the Counterclaim is dismissed, the affirmative defense remains. Fed. R. Civ. P. Rule

12(f).