Real Property Law

U.S. Court of Appeals, Second Circuit

(Opinion by Meskill, J.)

In a criminal forfeiture proceeding, a third-party purchaser of the subject property appealed from the District Court's dismissal of her petition to intervene in the forfeiture proceeding. The Second Circuit reversed and remanded, holding that the criminal forfeiture statute contemplates only forfeiture of the criminal defendant's interest in disputed land, not of all interests in that land.

In 1998, Serendesky purchased the subject parcel as a joint tenant with his wife. The parties initially financed the purchase with a mortgage, but they paid off that mortgage and took a new mortgage loan on Aug. 31, 2000.

That mortgage was recorded on Nov. 30, 2000. In the interim, on Oct. 5, 2000, the U.S. government indicted Serendesky for conspiracy to commit bank fraud and conspiracy to launder money. Each count had a corresponding criminal forfeiture count identifying the subject parcel. On Oct. 25, the government filed a notice of pendency. While Serendesky was under indictment, he and his wife defaulted on the mortgage. Ultimately, in 2001, Serendesky pleaded guilty and consented to the forfeitures. Subsequently, on May 20, 2002, Plaza Homes obtained a referee's deed in foreclosure, and sold the property the same day to Pacheco, who recorded her deed on June 27, 2002. Pacheco knew of the ongoing forfeiture proceedings. Then, in October 2002, Pacheco filed a third-party petition in the forfeiture proceeding claiming an interest in the premises. The District Court dismissed the petition, concluding that Pacheco had no interest in the property. Pacheco appealed,

In reversing, the Second Circuit first agreed that Pacheco was not a bona fide purchaser of the subject parcel. The court went on, however, to conclude that the criminal forfeiture statute, 21 USC sec. 853, compels forfeiture only of a criminal defendant's interest in a parcel of land, not the parcel of land itself. The court suggested that the government's acquisition of an innocent party's interest in land might constitute an unconstitutional taking or deprivation of property without due process, and held that the statute should be read to avoid constitutional concerns. In addition, the court noted that the civil forfeiture statute has been construed to permit partial forfeitures, and held that the same result should apply under the criminal forfeiture statute, despite different statutory language. As a result, the government only acquired Serendesky's interest in the disputed parcel, not his wife's interest. The mortgagee, therefore, was free to foreclose on the remainder of the property. Pacheco's complaint, therefore, adequately alleged that she was a bona fide purchaser of the wife's interest in the property, and she therefore had standing to challenge the forfeiture. The court remanded for further proceedings, without passing on the ultimate validity of Pacheco's claim.

Federal Law Preempts Regulation of Mortgage Escrow Accounts

Flagg v. Yonkers Savings and Loan Association

NYLJ 2/1/04, p. 20, col. 3

U.S. Ct. Appeals, Second Circuit

(Opinion by Straub, J.)

A mortgagor appealed from a judgment by federal district court dismissing its complaint seeking interest on funds held by the mortgagee bank in an escrow account. The Second Circuit affirmed, holding that federal law pre-empts regulation of mortgage escrow accounts held by federal savings associations.

The mortgagor entered into a mortgage agreement with a federal savings association. The mortgage agreement provided that the mortgagor would pay taxes and other fees into escrow, and also provided that the mortgagee would not pay interest on the escrow funds unless the mortgagee and mortgagor executed a separate agreement for interest, or “the law requires Lender to pay interest on the Funds.” The association did not pay interest on the funds until May 2002. At that time, the association merged with another bank, which began to pay interest on the funds. The mortgagor then brought this action for past interest that it alleges was due under New York law, and for declaratory relief. The association moved to dismiss, and the mortgagor cross-moved for summary judgment. The District Court granted the association's motion, holding that federal law had pre-empted the field of mortgage escrow accounts held by federal savings associations. The mortgagor appealed.

In affirming, the Second Circuit rejected the mortgagor's argument that the Office of Thrift Supervision lacked statutory authority to preempt state law, which requires payment of interest on mortgage escrow accounts. The court cited the broad grant of statutory authority, which gives the director of the office power to provide for the operation and regulation of federal savings associations. 12 USC sec. 1464(a). The court also rejected the mortgagor's argument that the OTS regulation is inconsistent with the federal Real Estate Settlement Procedures Act (RESPA). Finally, the court held that the agreement did not incorporate New York state law requiring payment of interest, because the agreement required payment “unless required by law,” and the OTS regulations were themselves “law,” and exempt the association from any requirement that it pay interest on escrow accounts.

Tax Sale Terminates Privity Necessary for Enforcement of Covenant

Conigliaro v. 2952 Victory Blvd. Pump Co.

NYLJ 1/20/05, p. 19, col. 3

Supreme Ct., Richmond Cty

(Maltese, J.)

In an action by homeowners to enjoin collection of pumping station fees by the owner of a neighboring pumping station, homeowners sought a preliminary injunction. The court granted the injunction, holding that the landowners were no longer bound by a covenant requiring payment of the fees.

In 1978 and 1979, Trailway Pumping station entered into agreements styled “Declaration of Covenants” with a number of developers. Pursuant to these covenants, Trailway agreed to connect houses in the developments to sewers, and ultimately to its pump and lift station. The covenants also required that the homeowners pay specified annual charges ranging from $150 to $250. Trailway also covenanted to continue operating the pumping station. Trailway, however, stopped operating the station, leading ultimately to tax forfeiture to the City of New York. In 2003, the real property on which the pumping station was located was sold at public auction. Auction purchaser ultimately assigned its interest to 2952 Victory, which began invoicing homeowners for pump services dating back to 1998. Homeowners then brought this action to enjoin these collections.

In granting a preliminary injunction, the court held that the covenants had terminated because 2952 Victory does not appear to be a successor to Trailway. As a result, the court concluded that the covenant was unenforceable by 2952 Victory due to a lack of privity of estate. The court also rejected 2952 Victory's claim that the pump station's right to collect the fees was a personal right independent of the realty on which the pump station was located, noting that 2952 could point to no agreement severing the pump station from the realty. Because the homeowners had demonstrated a likelihood of success on the merits, together with irreparable harm and a balance of the equities, the court awarded homeowners a preliminary injunction.

COMMENT

In Neponsit Property Owners' Ass'n v. Emigrant Industrial Sav. Bank, 278 NY 248, the Court of Appeals relaxed the strict prohibition on enforcement of affirmative covenants. The court held that a covenant that each owner in a subdivision should pay an annual assessment to a property owners' association for the maintenance of common facilities such as roads, paths, parks, and sewers ran with the land so as to be enforceable by a successor of the original covenantee against a successor of the original covenantor. Noting that a property association was a convenient instrument created by the original landowner to preserve a common benefit in the use of land, the court acknowledged the historic distinction between restrictive and affirmative covenants but concluded that the demands of realism required the recognition of exceptions.

Despite Neponsit, the court in Nassau County v. Kensington Ass'n held that a successor interest was not entitled to enforce an affirmative covenant to pay an annual fee to support road, trash, and sewer maintenance. Holding that the successor in interest, who obtained title pursuant to a tax sale, did not have the necessary privity of estate with the original grantor, the court reasoned that it was still the general rule in New York that affirmative covenants did not run with the land. 1940 N.Y. Misc. Lexis 1905. The court distinguished Neponsit, noting, in that the association in Kensington was not committed by the terms of the covenant to use the funds collected for any particular purpose in connection with the land, although it was apparently shown that the association did in fact maintain a park, collected garbage and performed various services for its members.

In Conigliaro, the covenants did specify that the fee would be reserved for pumping services, but the original grantor breached its covenant and stopped providing the services. Perhaps this interruption led the court to conclude that the tax sale purchaser lacked the necessary privity to enforce the covenant. If the court had held the covenant enforceable, 2952 Victory would have obtained pumping fees for services it had not performed and thus would have obtained an increased value of the land at the expense of the neighboring landowners.

The decision in Conigliaro was unusual in the fact that the court invoked the doctrine of privity of estate to prevent enforcement of the covenant. More typically, the problem arises when the originally benefited party seeks to enforce the covenant against successors in interest to the burdened parcel. In that situation, courts might hold the covenant unenforceable for failure to “touch and concern” the land. Thus, in Eagle Enterprises, Inc. v. Gross, 39 NY2d 253, the Court of Appeals held that an affirmative covenant to supply water did not sufficiently touch and concern the land to be enforceable against successors in interest. In Eagle Enterprises, if the landowners terminated the water services it was not shown that the subdivision would have been deprived of water. Similarly, in Conigliaro, the landowners were not deprived of sewage pumping services once Trailway became defunct and ceased operating the station. The difference is that in Conigliaro, some of the parties originally bound by the covenant sought to escape its operation; touch and concern operates only to excuse successors-in-interest.

Trial Required to Determine If Industry Custom Requires Mortgage Lender to Execute Assignment

767 Third Avenue LLC v. Orix Capital Markets LLC

NYLJ 2/2/05, p. 18, col. 1

Supreme Ct., N.Y. Cty

(Fried, J.)

In an action by mortgagors alleging that the mortgagee breached its contracts by failing to deliver an assignment of mortgage upon payment of a reasonable fee, the mortgagee moved for summary judgment dismissing the complaint. The court denied the mortgagee's motion, holding that questions of fact precluded summary judgment.

In 1998, mortgagor 767 executed loan documents, including a mortgage securing a $41,500,000 loan. That mortgage loan was eventually assigned to Orix as servicer for the trust that held the mortgage. In 2003, 767 advised Orix that it intended to refinance the loan, and it requested an assignment of the mortgage so that 767 would not have to pay the $1,815,000 mortgage recording tax that would have become due if Orix had issued a satisfaction of the mortgage, requiring 767 to record a new mortgage for the entire balance of the new loan. Orix agreed to prepare and provide an assignment, but only on condition that 767 pay a fee of $413,819.77, representing one percent of the loan's outstanding balance. Orix also required 767 to sign a release from any claims relating to payment of the fee. 767 paid the release and signed the fee.

The following year, mortgagor 320, a related entity, informed Orix that it intended to repay a different note held by Orix, and sought an assignment of the mortgage accompanying the note. This time, Orix denied the assignment, and when 320 prepaid the note, Orix delivered a satisfaction. 320 then paid a mortgage recording tax of $275,900 on its new, larger mortgage, including $160,875 in tax that would not have been due if Orix had delivered an assignment. 767 and 320 then brought this action against Orix, alleging breach of contract among other causes of action. Orix sought summary judgment, alleging that 767's claim was barred by the release, and also alleging that neither contract obligated Orix to deliver an assignment.

In denying Orix's summary judgment motion, the court first concluded that 767 had raised questions of fact about whether the release had been procured through fraud. In particular, 767 had alleged that Orix had made false representations that it was acting within the authority granted by the trustee that owned the mortgage. The court then turned to the breach of contract claims, and concluded that even though the mortgage documents did not explicitly require assignment, 767 and 320 had raised questions of fact about whether custom in the industry required a lender acting in good faith to execute an assignment upon payment of a reasonable fee for preparation of the necessary documents. The court concluded that the merger clause in the mortgage documents did not preclude mortgagors from introducing evidence of industry custom. As a result, the court concluded that summary judgment was inappropriate.

COMMENT

RPL ' 275(1) gives mortgagors the right to a “certificate of discharge,” commonly known as a satisfaction, whenever the full amount of principal and interest due on the mortgage has been paid. RPL ' 275(2) then provides that the full amount of principal and interest due shall not be considered paid when the original lender assigns the note and mortgage to another lender. The statute does not, however give the mortgagor a right to an assignment. By contrast, before the statute was amended in 1989, section 275 required mortgagees to deliver assignments on demand. TSB-M-89 [6.1]-R (Aug. 3, 1989). The amendments were intended to prevent the use of “dormant mortgages” as security on new loans to avoid the mortgage recording tax. Id. However, the amendments created the current situation where mortgagees withhold assignments from refinancing mortgagors until the mortgagor pays service fees. Bratin v. Flushing Savings Bank, 259 A.D.2d 510. Mortgagees on the original debt can negotiate service fees up to any amount below the mortgagor's anticipated mortgage recording tax, which reaches 2.5% on commercial mortgages over five hundred thousand dollars in New York City. N.Y. Tax Law ' 253-a.

Despite the language of RPL ' 275, New York courts have directed assignments where the mortgagor has a right to redeem and otherwise the property would be foreclosed. River Bank Am. v. Stabile, 216 A.D.2d 104; 2301 Jerome Ave. Realty Corp. v. Di Paolo, 190 Misc. 2d 383. In 2301 Jerome, the mortgagor secured financing to redeem the accelerated amount due. While the mortgagee was prepared to accept the payment, it refused to assign the mortgage to the new mortgagee. The court, in an effort to protect the mortgagor, directed the mortgagee to assign the mortgage. However, New York courts refuse to expand this protection to voluntary refinancings. Thus, in Harris v. Crossland Mtge. Corp., 160 Misc. 2d 520, the mortgagor voluntarily refinanced their mortgage and requested an assignment. Id. The Crossland court, in refusing to direct an assignment, distinguished between situations where a mortgagor elected voluntarily to refinance and the 2301 Jerome situation where a mortgagor attempted to stave off foreclosure. Id. at 522. The court refused to offer the extra-statutory protection where no threat of losing the property existed, no foreclosure action was imminent, and no outside force motivated the refinancing. Id.

As evidenced in 767 Third Ave., a mortgagors must negotiate for an assignment either in the original mortgage agreement or at the time of refinancing. Courts have upheld agreements for “reasonable service fees” for the preparation of the documents pursuant to RPL ' 275. Bratin. On two occasions the New York Legislature has attempted to remedy the situation by mandating assignments. Gov. Mario M. Cuomo vetoed the measure in 1994, and Gov. George E. Pataki did the same in 1996. Governor's Veto Memorandum, N.Y.S. Legislative Annual 1994, p. 561; Governor's Veto Memorandum, N.Y.S. Legislative Annual 1996, p. 620. Both vetoing governors cited the loss of tax revenue. Id. However, the current law fails to generate greater tax revenue in refinancings; rather it provides mortgagees the opportunity to charge refinancing mortgagors a fee just short of their anticipated recording tax liability.

Alleged Misrepresentation By Purchaser

Estate of Boothe v. Alpha Development Corp.

NYLJ 2/7/05, p. 4., col. 2

AppDiv, Second Dept

(memorandum opinion)

In a seller's action to impose a mortgage on real property, the seller appealed from the Supreme Court's cancellation of the notice of pendency and grant of the purchaser's summary judgment motion. The Appellate Division affirmed, holding that the seller's misrepresentation claims could not support the claimed mortgage.

The seller contracted to sell the subject property to the purchaser. At closing, the purchaser asserted that the property lacked a water meter and that there was an illegal extension to a structure on the property. The purchaser sought a $10,000 reduction in the purchase price to correct these defects, and the seller agreed. The sale then closed. The purchaser later discovered that the extension was legal, and that the property had a water meter. The seller then brought this action pursuant to RPAPL 1602, alleging that he had been fraudulently induced into selling the property for $10,000 less than the price for which the parties had contracted. The seller filed a notice of pendency, but the Supreme Court canceled the notice and granted summary judgment to the purchaser.

In affirming, the Appellate division emphasized that in a contract for the sale of real property, a misrepresentation claim will not lie unless the facts allegedly misrepresented were peculiarly within the knowledge of the party making the misrepresentation. Moreover, a party cannot prevail on a misrepresentation claim unless that party makes use of the means available to learn, in the exercise of ordinary intelligence, the truth of the matters represented. In this case, the court concluded that the misrepresentations were with respect to matter the seller could easily have discovered. As a result, the Supreme Court had properly dismissed the petition.

COMMENT

Where ownership of real property is divided into one or more possessory interests and one or more future interests, RPAPL ' 1602 permits an interest-holder to request a court order for the sale, lease or mortgage of the property. The seller in Estate of Boothe apparently argued that purchaser's fraudulent inducement of the sale left seller with a future interest in the property, and triggered application of the statute. Courts, however, have construed the statute to authorize a sale in those cases where the holder of an interest in property had no alternative remedy. Thus, in Matter of Gaffers, 254 A.D. 448, the court held that the holder of a life estate could invoke the statute to direct a sale when the property's purchase price was substantially higher than its appraised value; the rent was inadequate to pay the taxes, and the house was, at any rate, unoccupied.

In Estate of Boothe, by contrast, the seller had more expedient remedies at hand: in particular, a tort action for fraud, or an action to rescind the contract for fraud To prevail in an action based on misrepresentation, the seller would have to demonstrate: 1) that facts misrepresented by the second party were specifically within the second party's knowledge; and 2) that the complainant could not, by the exercise of reasonable intelligence, ascertain the truth behind the misrepresentation. Thus, in Adams v. Gillig, 199 N.Y. 314; 92 N.E. 670 (1910), the Court of Appeals awarded rescission to a seller against a purchaser who had claimed that he wanted to buy a vacant lot to build a residence, when in fact he wanted to construct a commercial garage. The seller feared that the construction of a garage would severely devalue its adjoining property. The court emphasized that the misrepresentation in Gillig pertained to the buyer's motives, which could not be ascertained by the seller's exercise of due diligence.

No claim of misrepresentation will lie, however, in cases where a party has signed an explicit statement to the effect that it has not relied on representations beyond those contained in the contract. In Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 157 N.E.2d 597 (1959), the Court of Appeals rejected a misrepresentation claim, noting that although a generic merger clause might not effect a waiver of the buyer's fraud claim, this buyer had signed a contract stating, that it had “inspected the premises and [agreed] to take the premises 'as is',” and also that the contract was “entered into after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other. The Purchaser has inspected the buildings standing on said premises and is thoroughly acquainted with their condition.”

Deed Restriction on Use of Easement

Ewing v. Watson

NYLJ 2/14/05, p. 29, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action by servient owners to quiet title in a strip of their land subject to an easement, the dominant owners appealed from Supreme Court's judgment denying their summary judgment motion and granting summary judgment to the servient owners. The Appellate Division modified to deny all summary judgment motions, holding that a deed restriction limiting use of the strip of land did not prevent conveyance of an easement interest in the strip.

In 1984, the then-owner of the dominant and servient land applied to subdivide the parcel. The town planning board approved the subdivision subject to covenants and restrictions. Among the restrictions was one that prohibited further subdivision of the dominant land without the approval of the planning board, and a second that provided that the 20-foot strip located on the servient land would not be made available as legal access for any parcel other than the servient parcel itself without the approval of the planning board. Nevertheless, in 2000, the owner of the dominant land began to subdivide the parcel, and to grant easements over the strip to purchasers of each subparcel located within the dominant parcel. One of the new owners sought and received approval from the planning board for use of the 20-foot strip; the other new owners did not. As a result, the servient owner brought this action, contending that the easements filed without planning board approval should be extinguished as violations of the 1984 covenants. The Supreme Court agreed, and awarded summary judgment to servient owner. The dominant owners appealed.

In modifying to deny summary judgment to both parties, the Appellate Division stressed that the declaration of restrictions should be read only to limit use of the strip without the approval of the planning board, not to limit conveyance of the strip. The court emphasized that any ambiguity in a restrictive covenant should be construed against the party seeking to enforce it — here, the owner of the servient land. As a result, the court held that the servient owners should not have been awarded summary judgment.

Criminal Forfeiture Statute Affects Only Criminal Defendant's Interest in Land

Pacheco v. Serendesky

NYLJ 2/2/05, p. 18, col. 1

U.S. Court of Appeals, Second Circuit

(Opinion by Meskill, J.)

In a criminal forfeiture proceeding, a third-party purchaser of the subject property appealed from the District Court's dismissal of her petition to intervene in the forfeiture proceeding. The Second Circuit reversed and remanded, holding that the criminal forfeiture statute contemplates only forfeiture of the criminal defendant's interest in disputed land, not of all interests in that land.

In 1998, Serendesky purchased the subject parcel as a joint tenant with his wife. The parties initially financed the purchase with a mortgage, but they paid off that mortgage and took a new mortgage loan on Aug. 31, 2000.

That mortgage was recorded on Nov. 30, 2000. In the interim, on Oct. 5, 2000, the U.S. government indicted Serendesky for conspiracy to commit bank fraud and conspiracy to launder money. Each count had a corresponding criminal forfeiture count identifying the subject parcel. On Oct. 25, the government filed a notice of pendency. While Serendesky was under indictment, he and his wife defaulted on the mortgage. Ultimately, in 2001, Serendesky pleaded guilty and consented to the forfeitures. Subsequently, on May 20, 2002, Plaza Homes obtained a referee's deed in foreclosure, and sold the property the same day to Pacheco, who recorded her deed on June 27, 2002. Pacheco knew of the ongoing forfeiture proceedings. Then, in October 2002, Pacheco filed a third-party petition in the forfeiture proceeding claiming an interest in the premises. The District Court dismissed the petition, concluding that Pacheco had no interest in the property. Pacheco appealed,

In reversing, the Second Circuit first agreed that Pacheco was not a bona fide purchaser of the subject parcel. The court went on, however, to conclude that the criminal forfeiture statute, 21 USC sec. 853, compels forfeiture only of a criminal defendant's interest in a parcel of land, not the parcel of land itself. The court suggested that the government's acquisition of an innocent party's interest in land might constitute an unconstitutional taking or deprivation of property without due process, and held that the statute should be read to avoid constitutional concerns. In addition, the court noted that the civil forfeiture statute has been construed to permit partial forfeitures, and held that the same result should apply under the criminal forfeiture statute, despite different statutory language. As a result, the government only acquired Serendesky's interest in the disputed parcel, not his wife's interest. The mortgagee, therefore, was free to foreclose on the remainder of the property. Pacheco's complaint, therefore, adequately alleged that she was a bona fide purchaser of the wife's interest in the property, and she therefore had standing to challenge the forfeiture. The court remanded for further proceedings, without passing on the ultimate validity of Pacheco's claim.

Federal Law Preempts Regulation of Mortgage Escrow Accounts

Flagg v. Yonkers Savings and Loan Association

NYLJ 2/1/04, p. 20, col. 3

U.S. Ct. Appeals, Second Circuit

(Opinion by Straub, J.)

A mortgagor appealed from a judgment by federal district court dismissing its complaint seeking interest on funds held by the mortgagee bank in an escrow account. The Second Circuit affirmed, holding that federal law pre-empts regulation of mortgage escrow accounts held by federal savings associations.

The mortgagor entered into a mortgage agreement with a federal savings association. The mortgage agreement provided that the mortgagor would pay taxes and other fees into escrow, and also provided that the mortgagee would not pay interest on the escrow funds unless the mortgagee and mortgagor executed a separate agreement for interest, or “the law requires Lender to pay interest on the Funds.” The association did not pay interest on the funds until May 2002. At that time, the association merged with another bank, which began to pay interest on the funds. The mortgagor then brought this action for past interest that it alleges was due under New York law, and for declaratory relief. The association moved to dismiss, and the mortgagor cross-moved for summary judgment. The District Court granted the association's motion, holding that federal law had pre-empted the field of mortgage escrow accounts held by federal savings associations. The mortgagor appealed.

In affirming, the Second Circuit rejected the mortgagor's argument that the Office of Thrift Supervision lacked statutory authority to preempt state law, which requires payment of interest on mortgage escrow accounts. The court cited the broad grant of statutory authority, which gives the director of the office power to provide for the operation and regulation of federal savings associations. 12 USC sec. 1464(a). The court also rejected the mortgagor's argument that the OTS regulation is inconsistent with the federal Real Estate Settlement Procedures Act (RESPA). Finally, the court held that the agreement did not incorporate New York state law requiring payment of interest, because the agreement required payment “unless required by law,” and the OTS regulations were themselves “law,” and exempt the association from any requirement that it pay interest on escrow accounts.

Tax Sale Terminates Privity Necessary for Enforcement of Covenant

Conigliaro v. 2952 Victory Blvd. Pump Co.

NYLJ 1/20/05, p. 19, col. 3

Supreme Ct., Richmond Cty

(Maltese, J.)

In an action by homeowners to enjoin collection of pumping station fees by the owner of a neighboring pumping station, homeowners sought a preliminary injunction. The court granted the injunction, holding that the landowners were no longer bound by a covenant requiring payment of the fees.

In 1978 and 1979, Trailway Pumping station entered into agreements styled “Declaration of Covenants” with a number of developers. Pursuant to these covenants, Trailway agreed to connect houses in the developments to sewers, and ultimately to its pump and lift station. The covenants also required that the homeowners pay specified annual charges ranging from $150 to $250. Trailway also covenanted to continue operating the pumping station. Trailway, however, stopped operating the station, leading ultimately to tax forfeiture to the City of New York. In 2003, the real property on which the pumping station was located was sold at public auction. Auction purchaser ultimately assigned its interest to 2952 Victory, which began invoicing homeowners for pump services dating back to 1998. Homeowners then brought this action to enjoin these collections.

In granting a preliminary injunction, the court held that the covenants had terminated because 2952 Victory does not appear to be a successor to Trailway. As a result, the court concluded that the covenant was unenforceable by 2952 Victory due to a lack of privity of estate. The court also rejected 2952 Victory's claim that the pump station's right to collect the fees was a personal right independent of the realty on which the pump station was located, noting that 2952 could point to no agreement severing the pump station from the realty. Because the homeowners had demonstrated a likelihood of success on the merits, together with irreparable harm and a balance of the equities, the court awarded homeowners a preliminary injunction.

COMMENT

In Neponsit Property Owners' Ass'n v. Emigrant Industrial Sav. Bank, 278 NY 248, the Court of Appeals relaxed the strict prohibition on enforcement of affirmative covenants. The court held that a covenant that each owner in a subdivision should pay an annual assessment to a property owners' association for the maintenance of common facilities such as roads, paths, parks, and sewers ran with the land so as to be enforceable by a successor of the original covenantee against a successor of the original covenantor. Noting that a property association was a convenient instrument created by the original landowner to preserve a common benefit in the use of land, the court acknowledged the historic distinction between restrictive and affirmative covenants but concluded that the demands of realism required the recognition of exceptions.

Despite Neponsit, the court in Nassau County v. Kensington Ass'n held that a successor interest was not entitled to enforce an affirmative covenant to pay an annual fee to support road, trash, and sewer maintenance. Holding that the successor in interest, who obtained title pursuant to a tax sale, did not have the necessary privity of estate with the original grantor, the court reasoned that it was still the general rule in New York that affirmative covenants did not run with the land. 1940 N.Y. Misc. Lexis 1905. The court distinguished Neponsit, noting, in that the association in Kensington was not committed by the terms of the covenant to use the funds collected for any particular purpose in connection with the land, although it was apparently shown that the association did in fact maintain a park, collected garbage and performed various services for its members.

In Conigliaro, the covenants did specify that the fee would be reserved for pumping services, but the original grantor breached its covenant and stopped providing the services. Perhaps this interruption led the court to conclude that the tax sale purchaser lacked the necessary privity to enforce the covenant. If the court had held the covenant enforceable, 2952 Victory would have obtained pumping fees for services it had not performed and thus would have obtained an increased value of the land at the expense of the neighboring landowners.

The decision in Conigliaro was unusual in the fact that the court invoked the doctrine of privity of estate to prevent enforcement of the covenant. More typically, the problem arises when the originally benefited party seeks to enforce the covenant against successors in interest to the burdened parcel. In that situation, courts might hold the covenant unenforceable for failure to “touch and concern” the land. Thus, in Eagle Enterprises, Inc. v. Gross, 39 NY2d 253, the Court of Appeals held that an affirmative covenant to supply water did not sufficiently touch and concern the land to be enforceable against successors in interest. In Eagle Enterprises, if the landowners terminated the water services it was not shown that the subdivision would have been deprived of water. Similarly, in Conigliaro, the landowners were not deprived of sewage pumping services once Trailway became defunct and ceased operating the station. The difference is that in Conigliaro, some of the parties originally bound by the covenant sought to escape its operation; touch and concern operates only to excuse successors-in-interest.

Trial Required to Determine If Industry Custom Requires Mortgage Lender to Execute Assignment

767 Third Avenue LLC v. Orix Capital Markets LLC

NYLJ 2/2/05, p. 18, col. 1

Supreme Ct., N.Y. Cty

(Fried, J.)

In an action by mortgagors alleging that the mortgagee breached its contracts by failing to deliver an assignment of mortgage upon payment of a reasonable fee, the mortgagee moved for summary judgment dismissing the complaint. The court denied the mortgagee's motion, holding that questions of fact precluded summary judgment.

In 1998, mortgagor 767 executed loan documents, including a mortgage securing a $41,500,000 loan. That mortgage loan was eventually assigned to Orix as servicer for the trust that held the mortgage. In 2003, 767 advised Orix that it intended to refinance the loan, and it requested an assignment of the mortgage so that 767 would not have to pay the $1,815,000 mortgage recording tax that would have become due if Orix had issued a satisfaction of the mortgage, requiring 767 to record a new mortgage for the entire balance of the new loan. Orix agreed to prepare and provide an assignment, but only on condition that 767 pay a fee of $413,819.77, representing one percent of the loan's outstanding balance. Orix also required 767 to sign a release from any claims relating to payment of the fee. 767 paid the release and signed the fee.

The following year, mortgagor 320, a related entity, informed Orix that it intended to repay a different note held by Orix, and sought an assignment of the mortgage accompanying the note. This time, Orix denied the assignment, and when 320 prepaid the note, Orix delivered a satisfaction. 320 then paid a mortgage recording tax of $275,900 on its new, larger mortgage, including $160,875 in tax that would not have been due if Orix had delivered an assignment. 767 and 320 then brought this action against Orix, alleging breach of contract among other causes of action. Orix sought summary judgment, alleging that 767's claim was barred by the release, and also alleging that neither contract obligated Orix to deliver an assignment.

In denying Orix's summary judgment motion, the court first concluded that 767 had raised questions of fact about whether the release had been procured through fraud. In particular, 767 had alleged that Orix had made false representations that it was acting within the authority granted by the trustee that owned the mortgage. The court then turned to the breach of contract claims, and concluded that even though the mortgage documents did not explicitly require assignment, 767 and 320 had raised questions of fact about whether custom in the industry required a lender acting in good faith to execute an assignment upon payment of a reasonable fee for preparation of the necessary documents. The court concluded that the merger clause in the mortgage documents did not preclude mortgagors from introducing evidence of industry custom. As a result, the court concluded that summary judgment was inappropriate.

COMMENT

RPL ' 275(1) gives mortgagors the right to a “certificate of discharge,” commonly known as a satisfaction, whenever the full amount of principal and interest due on the mortgage has been paid. RPL ' 275(2) then provides that the full amount of principal and interest due shall not be considered paid when the original lender assigns the note and mortgage to another lender. The statute does not, however give the mortgagor a right to an assignment. By contrast, before the statute was amended in 1989, section 275 required mortgagees to deliver assignments on demand. TSB-M-89 [6.1]-R (Aug. 3, 1989). The amendments were intended to prevent the use of “dormant mortgages” as security on new loans to avoid the mortgage recording tax. Id. However, the amendments created the current situation where mortgagees withhold assignments from refinancing mortgagors until the mortgagor pays service fees. Bratin v. Flushing Savings Bank, 259 A.D.2d 510. Mortgagees on the original debt can negotiate service fees up to any amount below the mortgagor's anticipated mortgage recording tax, which reaches 2.5% on commercial mortgages over five hundred thousand dollars in New York City. N.Y. Tax Law ' 253-a.

Despite the language of RPL ' 275, New York courts have directed assignments where the mortgagor has a right to redeem and otherwise the property would be foreclosed. River Bank Am. v. Stabile, 216 A.D.2d 104; 2301 Jerome Ave. Realty Corp. v. Di Paolo, 190 Misc. 2d 383. In 2301 Jerome, the mortgagor secured financing to redeem the accelerated amount due. While the mortgagee was prepared to accept the payment, it refused to assign the mortgage to the new mortgagee. The court, in an effort to protect the mortgagor, directed the mortgagee to assign the mortgage. However, New York courts refuse to expand this protection to voluntary refinancings. Thus, in Harris v. Crossland Mtge. Corp., 160 Misc. 2d 520, the mortgagor voluntarily refinanced their mortgage and requested an assignment. Id. The Crossland court, in refusing to direct an assignment, distinguished between situations where a mortgagor elected voluntarily to refinance and the 2301 Jerome situation where a mortgagor attempted to stave off foreclosure. Id. at 522. The court refused to offer the extra-statutory protection where no threat of losing the property existed, no foreclosure action was imminent, and no outside force motivated the refinancing. Id.

As evidenced in 767 Third Ave., a mortgagors must negotiate for an assignment either in the original mortgage agreement or at the time of refinancing. Courts have upheld agreements for “reasonable service fees” for the preparation of the documents pursuant to RPL ' 275. Bratin. On two occasions the New York Legislature has attempted to remedy the situation by mandating assignments. Gov. Mario M. Cuomo vetoed the measure in 1994, and Gov. George E. Pataki did the same in 1996. Governor's Veto Memorandum, N.Y.S. Legislative Annual 1994, p. 561; Governor's Veto Memorandum, N.Y.S. Legislative Annual 1996, p. 620. Both vetoing governors cited the loss of tax revenue. Id. However, the current law fails to generate greater tax revenue in refinancings; rather it provides mortgagees the opportunity to charge refinancing mortgagors a fee just short of their anticipated recording tax liability.

Alleged Misrepresentation By Purchaser

Estate of Boothe v. Alpha Development Corp.

NYLJ 2/7/05, p. 4., col. 2

AppDiv, Second Dept

(memorandum opinion)

In a seller's action to impose a mortgage on real property, the seller appealed from the Supreme Court's cancellation of the notice of pendency and grant of the purchaser's summary judgment motion. The Appellate Division affirmed, holding that the seller's misrepresentation claims could not support the claimed mortgage.

The seller contracted to sell the subject property to the purchaser. At closing, the purchaser asserted that the property lacked a water meter and that there was an illegal extension to a structure on the property. The purchaser sought a $10,000 reduction in the purchase price to correct these defects, and the seller agreed. The sale then closed. The purchaser later discovered that the extension was legal, and that the property had a water meter. The seller then brought this action pursuant to RPAPL 1602, alleging that he had been fraudulently induced into selling the property for $10,000 less than the price for which the parties had contracted. The seller filed a notice of pendency, but the Supreme Court canceled the notice and granted summary judgment to the purchaser.

In affirming, the Appellate division emphasized that in a contract for the sale of real property, a misrepresentation claim will not lie unless the facts allegedly misrepresented were peculiarly within the knowledge of the party making the misrepresentation. Moreover, a party cannot prevail on a misrepresentation claim unless that party makes use of the means available to learn, in the exercise of ordinary intelligence, the truth of the matters represented. In this case, the court concluded that the misrepresentations were with respect to matter the seller could easily have discovered. As a result, the Supreme Court had properly dismissed the petition.

COMMENT

Where ownership of real property is divided into one or more possessory interests and one or more future interests, RPAPL ' 1602 permits an interest-holder to request a court order for the sale, lease or mortgage of the property. The seller in Estate of Boothe apparently argued that purchaser's fraudulent inducement of the sale left seller with a future interest in the property, and triggered application of the statute. Courts, however, have construed the statute to authorize a sale in those cases where the holder of an interest in property had no alternative remedy. Thus, in Matter of Gaffers, 254 A.D. 448, the court held that the holder of a life estate could invoke the statute to direct a sale when the property's purchase price was substantially higher than its appraised value; the rent was inadequate to pay the taxes, and the house was, at any rate, unoccupied.

In Estate of Boothe, by contrast, the seller had more expedient remedies at hand: in particular, a tort action for fraud, or an action to rescind the contract for fraud To prevail in an action based on misrepresentation, the seller would have to demonstrate: 1) that facts misrepresented by the second party were specifically within the second party's knowledge; and 2) that the complainant could not, by the exercise of reasonable intelligence, ascertain the truth behind the misrepresentation. Thus, in Adams v. Gillig, 199 N.Y. 314; 92 N.E. 670 (1910), the Court of Appeals awarded rescission to a seller against a purchaser who had claimed that he wanted to buy a vacant lot to build a residence, when in fact he wanted to construct a commercial garage. The seller feared that the construction of a garage would severely devalue its adjoining property. The court emphasized that the misrepresentation in Gillig pertained to the buyer's motives, which could not be ascertained by the seller's exercise of due diligence.

No claim of misrepresentation will lie, however, in cases where a party has signed an explicit statement to the effect that it has not relied on representations beyond those contained in the contract. In Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 157 N.E.2d 597 (1959), the Court of Appeals rejected a misrepresentation claim, noting that although a generic merger clause might not effect a waiver of the buyer's fraud claim, this buyer had signed a contract stating, that it had “inspected the premises and [agreed] to take the premises 'as is',” and also that the contract was “entered into after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other. The Purchaser has inspected the buildings standing on said premises and is thoroughly acquainted with their condition.”

Deed Restriction on Use of Easement

Ewing v. Watson

NYLJ 2/14/05, p. 29, col. 6

AppDiv, Second Dept

(memorandum opinion)

In an action by servient owners to quiet title in a strip of their land subject to an easement, the dominant owners appealed from Supreme Court's judgment denying their summary judgment motion and granting summary judgment to the servient owners. The Appellate Division modified to deny all summary judgment motions, holding that a deed restriction limiting use of the strip of land did not prevent conveyance of an easement interest in the strip.

In 1984, the then-owner of the dominant and servient land applied to subdivide the parcel. The town planning board approved the subdivision subject to covenants and restrictions. Among the restrictions was one that prohibited further subdivision of the dominant land without the approval of the planning board, and a second that provided that the 20-foot strip located on the servient land would not be made available as legal access for any parcel other than the servient parcel itself without the approval of the planning board. Nevertheless, in 2000, the owner of the dominant land began to subdivide the parcel, and to grant easements over the strip to purchasers of each subparcel located within the dominant parcel. One of the new owners sought and received approval from the planning board for use of the 20-foot strip; the other new owners did not. As a result, the servient owner brought this action, contending that the easements filed without planning board approval should be extinguished as violations of the 1984 covenants. The Supreme Court agreed, and awarded summary judgment to servient owner. The dominant owners appealed.

In modifying to deny summary judgment to both parties, the Appellate Division stressed that the declaration of restrictions should be read only to limit use of the strip without the approval of the planning board, not to limit conveyance of the strip. The court emphasized that any ambiguity in a restrictive covenant should be construed against the party seeking to enforce it — here, the owner of the servient land. As a result, the court held that the servient owners should not have been awarded summary judgment.