Real Property Law

Supreme Ct., Kings Cty

(Ruditzky, J.)

In a strict foreclosure action, holder of a referee's deed moved for summary judgment, while tenant moved to dismiss for failure to state a cause of action. The court granted summary judgment to holder of the referee's deed, concluding that willful failure to name tenant in the original foreclosure proceeding is not a defense in a strict foreclosure action.

Plaintiff acquired the subject property through a referee's deed following a judgment of foreclosure and sale in a tax lien foreclosure action. Tenant was not named as a defendant in that foreclosure action. Three years after the foreclosure sale, plaintiff brought this strict foreclosure action against tenant, seeking also to recover use and occupancy. Tenant moved to dismiss, contending that failure to name tenant as a defendant in the original foreclosure action constituted “willful neglect” that precluded commencement of the current action, and also contending that the action was untimely because it was commenced more than six years after the original default.

In awarding strict foreclosure to holder of the referee's deed, the court first rejected tenant's statute of limitations claim. The court held that an action to foreclose a tax lien is not subject to any statute of limitations. The court then reasoned that plaintiff in this action stood in the same position as the city with respect to the tax lien, and that, as a result, no statute of limitations applies to its exercise of a foreclosure remedy. The court then rejected tenant's “willful neglect” defense, distinguishing between strict foreclosure actions and reforeclosure actions and holding that willful neglect is a defense only in reforeclosure actions. Because plaintiff in this case brought a strict foreclosure action, the defense was inapplicable. The court noted that tenant's remedy is his equitable right to redeem his landlord's mortgage. In awarding landlord a judgment of strict foreclosure, the court also awarded use and occupancy, measured by the rent provided in the lease tenant had signed with the prior landlord.

COMMENT

If a senior lienholder fails to name a person with subordinate interests as a defendant in his or her foreclosure action, the person with subordinate interests retains his or her property rights after the foreclosure sale. A purchaser wishing to extinguish these interests may commence either a reforeclosure or a strict foreclosure action. Both actions allow the person with subordinate interests a specific time period in which he or she may redeem his property right; if he fails to do so, the purchaser acquires an exclusive interest in the property. However, a lienholder's willful neglect to name the person with subordinate interests in the original foreclosure proceeding is a valid defense to reforeclosure actions but not strict foreclosure actions.

Reforeclosure actions are actual foreclosure proceedings that usually lead to the sale of the foreclosed property; strict foreclosure actions, by contrast, result in a court order providing that failure to redeem subordinate interests within a specific time period causes the person with subordinate interests to lose his claim to the property. Thus, the normal foreclosure provisions of RPAPL Article 13 govern reforeclosure actions, while the specialized provisions of RPAPL '1352 regarding strict foreclosure control strict foreclosure actions.

RPAPL '1532(1) provides that a purchaser may commence a reforeclosure action regardless of whether a regular foreclosure action would be time-barred. Strict foreclosure actions, on the other hand, are subject to the 6-year statute of limitations controlling typical foreclosure proceedings. See 6820 Ridge Realty, LLC v. Goldman, 701 N.Y.S.2d 69; Davis v. Cole, 747 N.Y.S.2d 722 (the courts, adjudicating strict foreclosure and reforeclosure actions respectively, compared reforeclosure with strict foreclosure actions).

Perhaps because purchasers may reforeclose on property at any time, the courts have barred reforeclosure actions when lienholders willfully neglect to name a necessary individual in their original foreclosure proceedings. Thus, when sustaining a reforeclosure action in Ahern v. Pierce, 653 N.Y.S.2d 620, the court emphasized the inadvertence of plaintiff lienholder when he failed to name junior lienholders in his original foreclosure action. By contrast, when upholding a strict foreclosure action in 2035 Realty Co. v. Howard Fuel Corp., 431 N.Y.S.2d 57, the court rejected junior lienholder's “willful neglect” defense, holding that whether omission was purposeful was irrelevant in a strict foreclosure action. Presumably the statutory time limit on strict foreclosure actions provides protection to holders of subordinate interests.

Title Insurer Not Liable for Delay in Recording Deed

Ulysses I & Co. v. First American Title Insurance Co.

NYLJ 10/27/03, p. 25, col. 1

AppDiv, First Dept

(memorandum opinion)

In purchaser's action against title insurer, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division modified to declare that purchaser's contract claim was not covered by the policy, but otherwise affirmed, concluding that purchaser was not damaged by any action of the title insurer.

Purchaser bought the subject premises with actual knowledge of a prior unrecorded sale contract. Purchaser bought title insurance from title insurer, and purchaser contends that title insurer failed to record the deed in a timely manner. Subsequently, a court determined that contract vendee under the prior contract enjoyed priority over plaintiff purchaser. Seller's sale to plaintiff purchaser was then rescinded. Purchaser then brought this action alleging first that title insurer had acted negligently in delaying recording of the deed, and second, that the “gap provision” in the title insurance policy, which provides coverage for events insured against during the period prior to the recording of the deed, protects purchaser against the losses purchaser suffered in this case. Supreme Court dismissed the complaint, but made no explicit declaration about the scope of the gap provision.

The Appellate Division affirmed dismissal of the complaint. The court noted that purchaser's knowledge of the prior contract deprived purchaser of bona fide purchaser status. As a result, any delay in recording purchaser's deed was immaterial, because purchaser would not have been entitled to the property even if the deed had been promptly recorded. In addition, the court concluded that in light of the contractual relationship between purchaser and the title insurer, the basis for any tort claim against the title insurer was unclear. Finally, the court declared that the gap provision did not cover plaintiff purchaser because that provision did not extend coverage to matters excluded by express limitations contained elsewhere in the same provision.

COMMENT

A purchaser of title insurance typically obtains a policy with limits that reflect his property's purchase price, which is often lower than the property's value at the time a title dispute arises. As a result, damage to the title may exceed policy limits. In order to recover the entire amount of damages sustained, the purchaser may attempt to recover from his insurance company in tort, where damages will not be subject to the policy limits.

When a title insurer undertakes responsibility not mandated by the title insurance policy, however, courts have permitted purchasers to recover in tort when the insurer acts negligently in fulfilling that responsibility. In the landmark decision of Cruz v. Commonwealth Land Title Insurance Co., 157 A.D.2d 333, a title insurance company delayed recording a purchaser's deed for 4 months. During the months in which the deed remained unrecorded, the property seller sold the property to another purchaser who recorded his deed prior to that of the plaintiff-purchaser. Upon discovering that he was “out of the chain of title,” the plaintiff-purchaser sued his insurance company in tort for damages incurred as a result of its negligence; the damages far exceeded the policy's $62,000 limit. The court examined the purchaser's policy and failed to find any provision discussing title recording. Reasoning that it was illogical to find the insurance company contractually liable for breach of a duty that was beyond contemplation of the policy, the court held the company liable in tort for its negligent recording of the purchaser's deed.

The Cruz court distinguished Smirlock by explaining that an action in tort may only be brought when an insurance company has affirmatively created or enhanced a defect in a purchaser's title. While the insurance company and the purchaser impliedly contract that the company will conduct a reasonable title search of the purchaser's property, the purchaser never impliedly consents to the creation or enhancement of a defect to his chain of title. Thus, although the policies in both cases contained similar provisions, the action in Smirlock arose from an insurance company's failure to detect a preexisting defect in a deed while the action in Cruz stemmed from a company's enhancement of a risk to title. In Ulysses I, unlike Cruz, there was no enhancement of risk to title, because purchaser's title was invalid at the outset.

Right of First Refusal Expired At Fee Owner's Death

Herrmann v. AMD Realty Inc.

NYLJ 10/15/03, p. 20, col. 1

Supreme Ct., Westchester Cty

(LaCava, J.)

Fee owners of unimproved real property brought a declaratory judgment action to determine the validity of a right of first refusal to purchase the property. The court held that the right of first refusal had expired at the death of current fee owners' father, and that, even if the right were not intended to expire at the father's death, it would have been an invalid restraint on alienation.

In 1982, as part of a lease surrender agreement, lessee of the subject parcel, who also owned an adjoining improved parcel, secured a right of first refusal over the subject property. The instrument creating that right specified that lessee would have ten days to accept the terms of any sale contract, except that lessee's purchase price would not exceed $75,000. The agreement also provided that it would continue in force and effect until the then-owner, father of current owners, “divests himself of the ownership” of the subject property. Father died in 1988. Tenant continued to lease the subject property until 2001, when it surrendered the subject premises to current fee owners, sold the adjoining property to AMD, and assigned the right of first refusal to AMD. When current fee owners attempted to sell the subject property for $300,000, they discovered the recorded agreement creating the right of first refusal. Current fee owners then brought this declaratory judgment action.

The court first concluded that the right of first refusal did not violate EPTL 9-1.1(b), New York's statutory rule against perpetuities, citing authority establishing that rights of first refusal do not violate the statute. The court then concluded that because the agreement made no reference to successors and assigns, the right was designed to bind only the then-owner of the subject property. As a result, the right expired at his death. The court went on to hold that even if the right survived the father's death, the right was invalid under the common law rule against restraints on alienation. In particular, the court cited the $75,000 price stated in the agreement as the element that made the agreement unreasonable in light of current market prices for the parcel. The court therefore granted fee owners a judgment declaring the right of first refusal invalid.

COMMENT

The Court of Appeals has held that an option to purchase property does not constitute an unreasonable restraint on alienation merely because the option's price is far below the current market price for that property. In Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, the court upheld an option which provided a corporation with the right, upon a shareholder's death, to repurchase the stock of a shareholder at the original purchase price. The court did so notwithstanding that the original purchase price was $5 and the current market price was in excess of $20. The court rejected subjecting the option to a price reasonableness test for two reasons. First, a reasonableness test would encourage expensive litigation to determine the option's fairness. Second, when the parties have agreed on a price formula that suits them, it is not appropriate for the courts to intervene. (See also Carroll v. Eno, 237 A.D.2d 102, where the court upheld an option to purchase a co-op at the insider price, notwithstanding the great disparity in price, based primarily on the same concerns expressed in Allen)

In Lam v. Chi, 222 A.D.2d 290, the Appellate Division developed an exception to the general rule: if the holder of the option can retain the option indefinitely, and the fee owner cannot require the option holder to either exercise the option or relinquish it, then the option constitutes an unreasonable restraint on alienation. In Lam, the option holder had the unrestricted and indefinite right to purchase 50% of the shares of a corporation, for $10. The court found the option to be invalid, as an unreasonable restraint on alienation.

In Kowalsky v. Familia, 71 Misc. 2d 287, a trial court refused to apply the Allen rule, and invalidated an option as an unreasonable restraint on alienation, based largely on the unfairness of the option's price. The option holder had the pre-emptive right to re-purchase a house and 17 acres of land for $2000 where the fair market value was $26,000. The court distinguished Allen, contending that in Allen the business motive of keeping the corporation closely held, sufficiently justified any restraint on alienation stemming from the price disparity. In contrast, in Kowalsky, the court could not conceive any reason for enforcing the option. Although the court in Herrmann appeared to endorse the Kowalsky approach, the discussion in Herrmann was largely dictum. The court only reached the discussion of reasonableness by assuming arguendo that the option was assignable – after concluding that the option was not, in fact, assignable.

Wilful Neglect Not a Defense in Strict Foreclosure Action

NYCTL 1996-1 Commercial Reo, LLP v. El Pequeno Restaurant Food Corp.

NYLJ 10/2/03, p. 20, col. 1

Supreme Ct., Kings Cty

(Ruditzky, J.)

In a strict foreclosure action, holder of a referee's deed moved for summary judgment, while tenant moved to dismiss for failure to state a cause of action. The court granted summary judgment to holder of the referee's deed, concluding that willful failure to name tenant in the original foreclosure proceeding is not a defense in a strict foreclosure action.

Plaintiff acquired the subject property through a referee's deed following a judgment of foreclosure and sale in a tax lien foreclosure action. Tenant was not named as a defendant in that foreclosure action. Three years after the foreclosure sale, plaintiff brought this strict foreclosure action against tenant, seeking also to recover use and occupancy. Tenant moved to dismiss, contending that failure to name tenant as a defendant in the original foreclosure action constituted “willful neglect” that precluded commencement of the current action, and also contending that the action was untimely because it was commenced more than six years after the original default.

In awarding strict foreclosure to holder of the referee's deed, the court first rejected tenant's statute of limitations claim. The court held that an action to foreclose a tax lien is not subject to any statute of limitations. The court then reasoned that plaintiff in this action stood in the same position as the city with respect to the tax lien, and that, as a result, no statute of limitations applies to its exercise of a foreclosure remedy. The court then rejected tenant's “willful neglect” defense, distinguishing between strict foreclosure actions and reforeclosure actions and holding that willful neglect is a defense only in reforeclosure actions. Because plaintiff in this case brought a strict foreclosure action, the defense was inapplicable. The court noted that tenant's remedy is his equitable right to redeem his landlord's mortgage. In awarding landlord a judgment of strict foreclosure, the court also awarded use and occupancy, measured by the rent provided in the lease tenant had signed with the prior landlord.

COMMENT

If a senior lienholder fails to name a person with subordinate interests as a defendant in his or her foreclosure action, the person with subordinate interests retains his or her property rights after the foreclosure sale. A purchaser wishing to extinguish these interests may commence either a reforeclosure or a strict foreclosure action. Both actions allow the person with subordinate interests a specific time period in which he or she may redeem his property right; if he fails to do so, the purchaser acquires an exclusive interest in the property. However, a lienholder's willful neglect to name the person with subordinate interests in the original foreclosure proceeding is a valid defense to reforeclosure actions but not strict foreclosure actions.

Reforeclosure actions are actual foreclosure proceedings that usually lead to the sale of the foreclosed property; strict foreclosure actions, by contrast, result in a court order providing that failure to redeem subordinate interests within a specific time period causes the person with subordinate interests to lose his claim to the property. Thus, the normal foreclosure provisions of RPAPL Article 13 govern reforeclosure actions, while the specialized provisions of RPAPL '1352 regarding strict foreclosure control strict foreclosure actions.

RPAPL '1532(1) provides that a purchaser may commence a reforeclosure action regardless of whether a regular foreclosure action would be time-barred. Strict foreclosure actions, on the other hand, are subject to the 6-year statute of limitations controlling typical foreclosure proceedings. See 6820 Ridge Realty, LLC v. Goldman, 701 N.Y.S.2d 69; Davis v. Cole, 747 N.Y.S.2d 722 (the courts, adjudicating strict foreclosure and reforeclosure actions respectively, compared reforeclosure with strict foreclosure actions).

Perhaps because purchasers may reforeclose on property at any time, the courts have barred reforeclosure actions when lienholders willfully neglect to name a necessary individual in their original foreclosure proceedings. Thus, when sustaining a reforeclosure action in Ahern v. Pierce, 653 N.Y.S.2d 620, the court emphasized the inadvertence of plaintiff lienholder when he failed to name junior lienholders in his original foreclosure action. By contrast, when upholding a strict foreclosure action in 2035 Realty Co. v. Howard Fuel Corp., 431 N.Y.S.2d 57, the court rejected junior lienholder's “willful neglect” defense, holding that whether omission was purposeful was irrelevant in a strict foreclosure action. Presumably the statutory time limit on strict foreclosure actions provides protection to holders of subordinate interests.

Title Insurer Not Liable for Delay in Recording Deed

Ulysses I & Co. v. First American Title Insurance Co.

NYLJ 10/27/03, p. 25, col. 1

AppDiv, First Dept

(memorandum opinion)

In purchaser's action against title insurer, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division modified to declare that purchaser's contract claim was not covered by the policy, but otherwise affirmed, concluding that purchaser was not damaged by any action of the title insurer.

Purchaser bought the subject premises with actual knowledge of a prior unrecorded sale contract. Purchaser bought title insurance from title insurer, and purchaser contends that title insurer failed to record the deed in a timely manner. Subsequently, a court determined that contract vendee under the prior contract enjoyed priority over plaintiff purchaser. Seller's sale to plaintiff purchaser was then rescinded. Purchaser then brought this action alleging first that title insurer had acted negligently in delaying recording of the deed, and second, that the “gap provision” in the title insurance policy, which provides coverage for events insured against during the period prior to the recording of the deed, protects purchaser against the losses purchaser suffered in this case. Supreme Court dismissed the complaint, but made no explicit declaration about the scope of the gap provision.

The Appellate Division affirmed dismissal of the complaint. The court noted that purchaser's knowledge of the prior contract deprived purchaser of bona fide purchaser status. As a result, any delay in recording purchaser's deed was immaterial, because purchaser would not have been entitled to the property even if the deed had been promptly recorded. In addition, the court concluded that in light of the contractual relationship between purchaser and the title insurer, the basis for any tort claim against the title insurer was unclear. Finally, the court declared that the gap provision did not cover plaintiff purchaser because that provision did not extend coverage to matters excluded by express limitations contained elsewhere in the same provision.

COMMENT

A purchaser of title insurance typically obtains a policy with limits that reflect his property's purchase price, which is often lower than the property's value at the time a title dispute arises. As a result, damage to the title may exceed policy limits. In order to recover the entire amount of damages sustained, the purchaser may attempt to recover from his insurance company in tort, where damages will not be subject to the policy limits.

When a title insurer undertakes responsibility not mandated by the title insurance policy, however, courts have permitted purchasers to recover in tort when the insurer acts negligently in fulfilling that responsibility. In the landmark decision of Cruz v. Commonwealth Land Title Insurance Co., 157 A.D.2d 333, a title insurance company delayed recording a purchaser's deed for 4 months. During the months in which the deed remained unrecorded, the property seller sold the property to another purchaser who recorded his deed prior to that of the plaintiff-purchaser. Upon discovering that he was “out of the chain of title,” the plaintiff-purchaser sued his insurance company in tort for damages incurred as a result of its negligence; the damages far exceeded the policy's $62,000 limit. The court examined the purchaser's policy and failed to find any provision discussing title recording. Reasoning that it was illogical to find the insurance company contractually liable for breach of a duty that was beyond contemplation of the policy, the court held the company liable in tort for its negligent recording of the purchaser's deed.

The Cruz court distinguished Smirlock by explaining that an action in tort may only be brought when an insurance company has affirmatively created or enhanced a defect in a purchaser's title. While the insurance company and the purchaser impliedly contract that the company will conduct a reasonable title search of the purchaser's property, the purchaser never impliedly consents to the creation or enhancement of a defect to his chain of title. Thus, although the policies in both cases contained similar provisions, the action in Smirlock arose from an insurance company's failure to detect a preexisting defect in a deed while the action in Cruz stemmed from a company's enhancement of a risk to title. In Ulysses I, unlike Cruz, there was no enhancement of risk to title, because purchaser's title was invalid at the outset.

Right of First Refusal Expired At Fee Owner's Death

Herrmann v. AMD Realty Inc.

NYLJ 10/15/03, p. 20, col. 1

Supreme Ct., Westchester Cty

(LaCava, J.)

Fee owners of unimproved real property brought a declaratory judgment action to determine the validity of a right of first refusal to purchase the property. The court held that the right of first refusal had expired at the death of current fee owners' father, and that, even if the right were not intended to expire at the father's death, it would have been an invalid restraint on alienation.

In 1982, as part of a lease surrender agreement, lessee of the subject parcel, who also owned an adjoining improved parcel, secured a right of first refusal over the subject property. The instrument creating that right specified that lessee would have ten days to accept the terms of any sale contract, except that lessee's purchase price would not exceed $75,000. The agreement also provided that it would continue in force and effect until the then-owner, father of current owners, “divests himself of the ownership” of the subject property. Father died in 1988. Tenant continued to lease the subject property until 2001, when it surrendered the subject premises to current fee owners, sold the adjoining property to AMD, and assigned the right of first refusal to AMD. When current fee owners attempted to sell the subject property for $300,000, they discovered the recorded agreement creating the right of first refusal. Current fee owners then brought this declaratory judgment action.

The court first concluded that the right of first refusal did not violate EPTL 9-1.1(b), New York's statutory rule against perpetuities, citing authority establishing that rights of first refusal do not violate the statute. The court then concluded that because the agreement made no reference to successors and assigns, the right was designed to bind only the then-owner of the subject property. As a result, the right expired at his death. The court went on to hold that even if the right survived the father's death, the right was invalid under the common law rule against restraints on alienation. In particular, the court cited the $75,000 price stated in the agreement as the element that made the agreement unreasonable in light of current market prices for the parcel. The court therefore granted fee owners a judgment declaring the right of first refusal invalid.

COMMENT

The Court of Appeals has held that an option to purchase property does not constitute an unreasonable restraint on alienation merely because the option's price is far below the current market price for that property. In Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, the court upheld an option which provided a corporation with the right, upon a shareholder's death, to repurchase the stock of a shareholder at the original purchase price. The court did so notwithstanding that the original purchase price was $5 and the current market price was in excess of $20. The court rejected subjecting the option to a price reasonableness test for two reasons. First, a reasonableness test would encourage expensive litigation to determine the option's fairness. Second, when the parties have agreed on a price formula that suits them, it is not appropriate for the courts to intervene. (See also Carroll v. Eno, 237 A.D.2d 102, where the court upheld an option to purchase a co-op at the insider price, notwithstanding the great disparity in price, based primarily on the same concerns expressed in Allen)

In Lam v. Chi, 222 A.D.2d 290, the Appellate Division developed an exception to the general rule: if the holder of the option can retain the option indefinitely, and the fee owner cannot require the option holder to either exercise the option or relinquish it, then the option constitutes an unreasonable restraint on alienation. In Lam, the option holder had the unrestricted and indefinite right to purchase 50% of the shares of a corporation, for $10. The court found the option to be invalid, as an unreasonable restraint on alienation.

In Kowalsky v. Familia, 71 Misc. 2d 287, a trial court refused to apply the Allen rule, and invalidated an option as an unreasonable restraint on alienation, based largely on the unfairness of the option's price. The option holder had the pre-emptive right to re-purchase a house and 17 acres of land for $2000 where the fair market value was $26,000. The court distinguished Allen, contending that in Allen the business motive of keeping the corporation closely held, sufficiently justified any restraint on alienation stemming from the price disparity. In contrast, in Kowalsky, the court could not conceive any reason for enforcing the option. Although the court in Herrmann appeared to endorse the Kowalsky approach, the discussion in Herrmann was largely dictum. The court only reached the discussion of reasonableness by assuming arguendo that the option was assignable – after concluding that the option was not, in fact, assignable.