In Rockland County, New York, the Times Herald Record
- Empire State Bank in the Town of Newburgh has been battling an unlikely foe in court: Rabbi Harvey Waxman, the leader of one of the oldest synagogues in a Rockland County Orthodox Jewish enclave.
Waxman and bank executives are fighting over a failed subdivision in Rockland County valued at nearly $2 million. The synagogue and the bank both claim their liens on the 11.5-acre property should be first in line for proceeds from its sale.
The bank, working with another financial institution, and the synagogue, Congregation Beth Medrosh of Monsey, each loaned more than $1 million to developer Tovi Mermelstein, who has built homes and rehabilitated apartments across Rockland, Orange and Sullivan counties.
Devastated by the downturn in the real estate market, Mermelstein stopped making payments on his loan to Empire State Bank by 2009. Rather than face foreclosure, he turned over the land to the bank. As Mermelstein washed his hands of the failed project, Empire State Bank was just beginning a complex legal battle.
Waxman's synagogue, Congregation Beth Medrosh, started its own foreclosure action in early 2010. Court proceedings took a turn for the bizarre with the appearance of a faxed letter — an apparent forgery — claiming the synagogue's loan had been paid off.
Empire State Bank relied on the letter in making its loan, and later, in taking back the deed to the land. With the letter in hand, the bank filed a lawsuit charging its title company and a real estate firm with fraud and negligence, and seeking more than $8 million in damages. Appellate judges in Brooklyn are now weighing the facts of the case.
- Waxman made the loan [for $1.2 million to developer Mermelstein on behalf of the synagogue in November, 2005] under a provision of Jewish law called Heter Iska, according to his deposition. Some Jews believe religious law bars them from paying loan interest to one another, but Heter Iska provides a loophole that treats loans as investments. It's the standard way of structuring business deals in the Hasidic community, Mermelstein said.
Mermelstein repaid $450,000 to the synagogue in 2006, and Waxman released a lien the congregation held on another of his properties, but not the Chestnut Ridge land, according to court papers. Mermelstein still owed the synagogue $750,000.
But, a mysterious fax on what appeared to be synagogue letterhead — albeit with the word "Congregation" misspelled — led Empire State Bank and its title insurance agent to believe otherwise. The letter states that Mermelstein had paid off the $750,000 balance owed to Congregation Beth Medrosh.
- Empire State, working with an undisclosed partner bank, extended Mermelstein a line of credit totaling $3.4 million, with an interest rate of about 6 to 7 percent, Mermelstein said. The title agent and Empire State relied on the faxed letter they believed to have come from Waxman's congregation.
Empire State took the lead in administering the loan because the partner bank was not local and construction projects need close supervision, Guarnieri said. Empire State was lending less than 20 percent of the money.
In a key — and routine — step in making the loan, Empire's title insurance agent, Sky Abstract in Spring Valley, assured bank executives the bank had the priority position on the property, said co-CEOs Tony Costa and [Philip] Guarnieri. Having the priority, or first, position ensures a lender is made whole first if the borrower defaults.
With the faxed letter in hand, and assurance they had first position, Empire State secured $3.4 million in title insurance, which is meant to insure a mortgage in case an abstract company like Sky makes a mistake in a records search and misses a lien.
- By 2009, [developer Mermelstein] stopped making payments. Empire State started to foreclose and then, instead of waiting out a process that could take three to four years, took back the deed to the property.
In early 2010, two months after Empire State took over the property, the congregation began its own foreclosure proceeding, and named Empire State Bank as a defendant.
The bank shot back with a lawsuit seeking damages of more than $8 million from Sky Abstract and Terrace Capital, alleging fraud and negligence. Contrary to the claim in the letter, Mermelstein's mortgage to the congregation hadn't been satisfied.
To date, no one has taken responsibility for the faxed letter, which is signed by an "I. Unger, Treasurer."
Rabbi Waxman's wife, Esther, said in court documents that she has been the treasurer for at least 10 years and has no idea who "I. Unger" might be. She added that the letter was faxed at 9:30 p.m. on a Friday, the Jewish Sabbath. On that day, Orthodox Jews, like her and her husband do not work, so they would not have faxed the letter.
It was faxed from Terrace Capital, a Manhattan real estate firm Mermelstein had worked with on the project, according to the letter's fax stamp. A Terrace Capital lawyer said the firm had no knowledge of the letter.
Rabbi Waxman said in a deposition that the letter did not come from his synagogue, and Mermelstein, who also observes the Sabbath, pointed his finger at another party.
Costa admitted in a phone interview that the letter was "obviously fraudulent." He suggests it was yet another organization's "chicanery."
"If I did the letter, I would have at least spelled the name right," Mermelstein said.
Waxman and representatives of Sky Abstract declined to comment.
A judge last year dismissed most of the bank's lawsuit against Sky Abstract and Terrace Capital, explaining that Empire State Bank had the means to determine whether or not the letter was legitimate, but didn't. The bank's attorney, Jonathan Nelson, appealed the decision to the Appellate Division. A decision is expected in the next few months.