Karali v. Araujo, 48 Misc. 3d 1043, 06/16/2015 (Emerson, J.)

Default; fraud; res judicata; discharge of debts; privity; jurisdiction

By Michael Vandermark | Senior Staff Writer

Plaintiffs sold a parcel of commercial real property in Hampton Bays, New York, to Defendant Araujo Familia Inc. (“Familia”) for $1.2 million.[1]

Familia borrowed $1,098,000 from Plaintiff for the purchase, executing a 20-year note secured by a mortgage on the property that was to be paid in monthly installments. Mr. Araujo, Familia’s sole shareholder, personally guaranteed the loan. Plaintiff then sold the next sixty (60) monthly payments due on the loan to Bank for $370,167.17. Plaintiff notified Familia of the terms of the agreement made with Bank and directed them to pay accordingly.

Familia subsequently defaulted on the loan and failed to pay the real estate taxes on the property. Bank notified Plaintiff of Familia’s default and stated that, under their agreement with Bank, Plaintiff had 15 days to cure the default.

Plaintiff failed to repay the loan, which constituted a default under the terms of their agreement with Bank. Said agreement provided that upon Plaintiff’s default, ownership of the note and mortgage vested entirely with Bank, and Plaintiff had no further rights. Bank commenced a foreclosure action against Familia.

Plaintiff intervened as co-plaintiffs, whereby they interposed a foreclosure complaint against Familia and cross-claimed against Bank. Plaintiff’s demands included, among other things, that they receive an equitable portion of the sale. Bank moved for summary judgment and dismissal of Plaintiff’s complaint and cross-claim, which the court summarily granted. Soon after, Defendant entered into a short sale of the property for $910,000 that was used to pay back Bank. Familia received the remainder. Plaintiff received nothing from the proceeding and sustained a loss of over seven hundred thousand dollars.

Plaintiff commenced another action against Familia and Mr. Araujo in an attempt to recover the monies. Plaintiff alleged Familia and Mr. Araujo had no intention of repaying the loan, and Mr. Araujo divested himself of assets to avoid making payments under his personal guarantee of the loan. Familia and Mr. Araujo moved for summary judgment, contending that the complaint failed to state a cause of action for fraud; that claim against Familia under the guarantee was discharged in bankruptcy and that the claim against Familia was adjudicated and extinguished in the prior foreclosure action. In opposition, Plaintiff contended that their claim was viable at least against Mr. Araujo, as he was not a party to the prior foreclosure action, a discharge in bankruptcy does not include debts incurred by fraud, and the evidence supported their claim of fraud.

Invoking res judiciata, the court found that Plaintiff’s fraud cause of action was barred because the action merely sought to re-litigate the claim to recover under the note and mortgage in the prior foreclosure action. The parties had a full and fair opportunity to litigate this in the prior action. Further, while Mr. Araujo himself was not a party to the prior action, he was, as sole shareholder of Familia, in privity with Familia. The Court rejected Plaintiff’s other cause of action, which sought to recover under Mr. Araujo’s personal guarantee. The Court noted that bankruptcy courts have exclusive jurisdiction to adjudicate matters such as fraud or falsehood when deciding whether to discharge a debt and that such findings are binding. The Court held that it was bound to accept the bankruptcy court’s findings that there was no fraudulent conduct to bar the debt’s discharge.

Karali v. Araujo, 48 Misc. 3d 1043, 06/16/2015 (Emerson, J.).

[1]The crux of this summary revolves around the action brought by the Karalis against Familia and Mr. Araujo. This action was undertaken after an initial lawsuit by the note-holder Grand Bank. The initial suit is noted in detail in this summary for factual and procedural purposes.

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