Real Property Law

AppDiv, Second Dept

(memorandum opinion)

In an action by landowner to recover damages for trespass and to enjoin neighbor from using a sanitary sewer line across landowner's property, landowner appealed from a Supreme Court judgment awarding damages to neighbor on its counterclaim and directing landowner to restore the sanitary sewer to its original condition and enjoining landowner from interfering with neighbor's rights under an easement. The Appellate Division modified to delete Supreme Court's provisions for injunctive relief, holding that the circumstances did not warrant grant of a mandatory injunction.

In 1998, neighbor entered into an agreement with landowner's predecessor granting neighbor an easement for the purpose of constructing a sanitary sewer across what is now landowner's property. The sewer line was installed in 1999, but the easement agreement was not recorded until Jan.10, 2001. Meanwhile, in 2000, landowner contracted to purchase his parcel. The deed, dated June 26, 2000, made no mention of an easement, and sellers did not inform landowner of any easement. Moreover, a title report indicated that there were no easements of record. Landowner then obtained a building permit for construction of a two-family house. During construction of the house, landowner's contractor severed a pipe, and at that time, landowner learned of the existence of the sewer line. Landowner hired a contractor to relocate and repair the sewer line, and then did another title search, which again revealed no easement. Landowner closed title on the parcel on Nov. 13, 2000. The building was completed in April 2001. Landowner brought this action in May 2001, seeking damages and injunctive relief resulting from neighbor's use of the sewer line. Neighbor counterclaimed, alleging that landowner took his parcel subject to the easement, and that landowner's construction of the house and relocation of the sewer line were causing backups into neighbor's basement apartment. Supreme Court awarded neighbor judgment on its counterclaim, and ordered landowner to restore the sewer line to its original position, which would required demolition of landowner's newly constructed house. The Supreme Court also awarded $8232.91 in damages.

In modifying, the Appellate Division emphasized that courts do not generally award injunctions that would require destruction of a building unless substantial benefit would be gained by the party seeking the injunction. In this case, the court emphasized that landowner had neither actual nor constructive notice of the easement at the time construction began, and that neighbor delayed in invoking the legal process to preserve the status quo. The court also relied on the hardship an injunction would work on landowner in holding that neighbor was not entitled to the draconian remedy of injunctive relief. The court affirmed the Supreme Court's award of damages to neighbor.

COMMENT

In the absence of harm, New York courts typically deny injunctive relief for the destruction or removal of a building constructed in violation of a private restriction. In Sunrise Plaza Assocs., L.P. v. Int'l Summit Equities Corp., 288 A.D.2d 300, the Appellate Division denied an injunction, which it labeled a “drastic” remedy, because the plaintiff presented no evidence of any harm or damage at all. The plaintiff and defendant owned adjoining lots which constituted a shopping center on which they had a cross-easement agreement, allowing each other unrestricted access to the parking area on each party's property. The defendant built on its land, thereby disturbing the building-to-parking area ratio contained in their agreement. The Appellate Division upheld Supreme Court's award of nominal damages and the Supreme Court's refusal to issue an injunction.

By contrast, in Maspeth Branch Realty, Inc. v. Waldbaum, Inc., 20 A.D.2d 896, the Appellate Division held an injunction appropriate when a building causes substantial harm to the movant. In Maspeth, the court held that the defendant's building addition caused substantial injury to the plaintiff. The plaintiff's property consisted of three industrial buildings and an office building. An easement entitled plaintiff to use a driveway on the adjacent lot for the ingress and egress of tractor trailers. Defendants built a large store on the unimproved adjacent lot, and raised the level of the property, making it impossible to maneuver tractor trailers through the driveway. Therefore the court remitted the action for a new trial in order for the defendant to have the opportunity to introduce new evidence. The court stated that, barring such evidence, an injunction should issue

When Performing Easement Agreement Is Impossible, Dominant Owner May Not Collect Damages

Chateau Rive Corp. v. Enclave Development Associates

NYLJ 10/11/02, p. 40, col. 3

AppDiv, Second Dept

(memorandum opinion)

In an action by dominant owner for specific performance of an agreement by servient owner to build a road, and for declaratory and injunctive relief, both parties appealed from a Supreme Court judgment denying specific performance but awarding dominant owner $1,821,177 in damages. The Appellate Division reversed and awarded servient owner summary judgment dismissing the complaint, holding that servient owner was not liable for damages because performance was impossible.

Servient owner entered into a written, recorded, agreement granting dominant owner's predecessor an easement across its land and obligating servient owner to build a paved road, with appurtenant utility lines, connecting the dominant parcel with a public road. The paved road was to be build through an adjacent municipally-owned lot. Dominant owner purchased its parcel, and then brought this action seeking specific performance and damages resulting from servient owner's breach. The Supreme Court initially granted summary judgment to dominant owner, but the Appellate Division, in a related case, subsequently determined that the municipally-owned lot had been impliedly dedicated as a public park. The Supreme Court, on renewal, then denied dominant owner's summary judgment motion on its claim for specific performance, but adhered to its prior determination on the claims for declaratory relief and damages. After a nonjury trial, The Supreme Court awarded damages.

In reversing the award of damages, the Appellate Division held that its prior determination that the municipally owned land was public parkland made servient owner's construction of the road impossible. Moreover, because performance was impossible when the contract was made, the contract was executed under a mutual mistake of fact, and was therefore voidable. As a result, servient owner could not be declared in breach of the covenant, and could not be held liable for damages or delay in constructing the road. As a result, servient owner was entitled to summary judgment dismissing the complaint.

Mortgagee Who Dispenses Money to Persons Other Than Corporate Mortgagor, Bank Risks Fraudulent Transfer Liability

Vazquez v. Riaz

NYLJ 9/21/05, p. 19, col. 3

Supreme Ct., Kings Cty

(Schmidt, J.).

In an action by judgment creditors to set aside a mortgage as a fraudulent conveyance, mortgagee bank moved to dismiss the complaint. The court denied mortgagee's motion, holding that questions of fact remained about whether the bank had notice of the creditors' claim, and about whether the bank gave fair consideration for the mortgage.

In 2000, plaintiffs in this action brought a personal injury action against corporate mortgagor. Two years later, mortgagor entered into a mortgage agreement with mortgagee bank. The bank took back a mortgage to secure a commercial loan of $499,000. President of the corporate mortgagor executed a personal guarantee of the loan. About three quarters of the loan proceeds were paid to the president of the corporate mortgagor or the president's wife; only about one-quarter of the proceeds was paid to the corporate mortgagor. In conjunction with the mortgage transaction, corporate mortgagor's counsel executed an “opinion letter” in which he stated that “[t]o our knowledge, there are no proceedings pending or threatened before any court … which will adversely affect the financial condition or operations of the Borrower or the Guarantor.” After plaintiffs received a substantial award in their personal injury action, they brought this action to set aside the mortgage as a fraudulent conveyance. Mortgagee bank moved to dismiss, contending that it had no knowledge of the personal injury action, and that it paid fair consideration for the mortgage.

In denying mortgagee bank's motion to dismiss, the court started by noting the mortgagor's clear intent to delay, hinder, or defraud its future creditors. The court acknowledged that mortgagor's opinion letter showed that mortgagor and its counsel were untruthful, but held that the documents did not conclusively demonstrate that the bank had no actual or constructive notice of the lawsuit. Moreover, the court observed that even if the bank had no notice of the lawsuit, the bank could avoid fraudulent conveyance law only if the bank could establish that it gave fair consideration. In the court's view, one element of fair consideration is good faith. Here, because so little of the mortgage money was dispensed to the corporate mortgagor, the court concluded that questions of fact remained about whether the bank made the transaction in good faith. As a result, the bank was not entitled to dismissal of the claim.

COMMENT

Debtor and Creditor Law section 278 invalidates a fraudulent conveyance, “against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser.” (emphasis added).

The Second Circuit has held that a transferee for adequate consideration is not protected against a fraudulent transfer claim when the transferee is aware of facts that should have led him to make further inquiries, but fails to make those inquiries. In HBE Leasing Corp. v. Frank, 48 F.3d 623, the transferee knew that the debtor corporation was on trial in a RICO action and that it had received large loans from its majority stockholder. Because the transferee did not make reasonable inquiries into the use of the mortgage proceeds, transferee was not protected against a fraudulent conveyance claim

The duty to inquire does not extend to a mortgagee who, in his normal course of conduct, has discovered no suspicious facts. Thus, in Morse v. Howard Park Corp., 50 Misc. 2d 834, the mortgagor's tenants changed their credit structure in an effort to eliminate their equity in the building they had built. Plaintiffs executed a mortgage with the landlord, which helped the tenants reduce their equity. The tenants' bondholders sought to set aside the mortgage, but the court emphasized that the mortgagee had uncovered no suspicious facts. Furthermore, the court held that the mortgagee's relationship with the tenants was too attenuated to require mortgagee to examine the tenants' credit structure in relation to the bondholders.

A mortgagee's duty to inquire is triggered, however, when the mortgagee lends with knowledge that occupancy of the mortgaged property is inconsistent with record title, or when the terms of the mortgage are so advantageous to suggest potential fraud. In United States v. Orozco-Prada 636 F. Supp 1537, Orozco was charged with money laundering, but before the government had the right to seize his property, Orozco conveyed it to Ballestas. Ballestas subsequently obtained a mortgage on the property. The court held that mortgagee was not protected against the government's claim to the property because the mortgagee had visited the property and discovered that Orozco's occupancy was inconsistent with Ballestas' record ownership. This discovery triggered a duty to inquire, and because the mortgagee had failed to make inquiry, mortgagee was held to have constructive knowledge of the fraud. The court added that the terms of the mortgage were also suspicious, because they were particularly advantageous to the lender. These terms, on their own, would have been sufficient to require the mortgagee to make additional inquiry.

Easement Holder Denied Injunctive Relief Requiring Removal of Neighboring Home

Nat Holding Corp. v. Banks

NYLJ 10/11/05, p. 39, col. 5

AppDiv, Second Dept

(memorandum opinion)

In an action by landowner to recover damages for trespass and to enjoin neighbor from using a sanitary sewer line across landowner's property, landowner appealed from a Supreme Court judgment awarding damages to neighbor on its counterclaim and directing landowner to restore the sanitary sewer to its original condition and enjoining landowner from interfering with neighbor's rights under an easement. The Appellate Division modified to delete Supreme Court's provisions for injunctive relief, holding that the circumstances did not warrant grant of a mandatory injunction.

In 1998, neighbor entered into an agreement with landowner's predecessor granting neighbor an easement for the purpose of constructing a sanitary sewer across what is now landowner's property. The sewer line was installed in 1999, but the easement agreement was not recorded until Jan.10, 2001. Meanwhile, in 2000, landowner contracted to purchase his parcel. The deed, dated June 26, 2000, made no mention of an easement, and sellers did not inform landowner of any easement. Moreover, a title report indicated that there were no easements of record. Landowner then obtained a building permit for construction of a two-family house. During construction of the house, landowner's contractor severed a pipe, and at that time, landowner learned of the existence of the sewer line. Landowner hired a contractor to relocate and repair the sewer line, and then did another title search, which again revealed no easement. Landowner closed title on the parcel on Nov. 13, 2000. The building was completed in April 2001. Landowner brought this action in May 2001, seeking damages and injunctive relief resulting from neighbor's use of the sewer line. Neighbor counterclaimed, alleging that landowner took his parcel subject to the easement, and that landowner's construction of the house and relocation of the sewer line were causing backups into neighbor's basement apartment. Supreme Court awarded neighbor judgment on its counterclaim, and ordered landowner to restore the sewer line to its original position, which would required demolition of landowner's newly constructed house. The Supreme Court also awarded $8232.91 in damages.

In modifying, the Appellate Division emphasized that courts do not generally award injunctions that would require destruction of a building unless substantial benefit would be gained by the party seeking the injunction. In this case, the court emphasized that landowner had neither actual nor constructive notice of the easement at the time construction began, and that neighbor delayed in invoking the legal process to preserve the status quo. The court also relied on the hardship an injunction would work on landowner in holding that neighbor was not entitled to the draconian remedy of injunctive relief. The court affirmed the Supreme Court's award of damages to neighbor.

COMMENT

In the absence of harm, New York courts typically deny injunctive relief for the destruction or removal of a building constructed in violation of a private restriction. In Sunrise Plaza Assocs., L.P. v. Int'l Summit Equities Corp., 288 A.D.2d 300, the Appellate Division denied an injunction, which it labeled a “drastic” remedy, because the plaintiff presented no evidence of any harm or damage at all. The plaintiff and defendant owned adjoining lots which constituted a shopping center on which they had a cross-easement agreement, allowing each other unrestricted access to the parking area on each party's property. The defendant built on its land, thereby disturbing the building-to-parking area ratio contained in their agreement. The Appellate Division upheld Supreme Court's award of nominal damages and the Supreme Court's refusal to issue an injunction.

By contrast, in Maspeth Branch Realty, Inc. v. Waldbaum, Inc., 20 A.D.2d 896, the Appellate Division held an injunction appropriate when a building causes substantial harm to the movant. In Maspeth, the court held that the defendant's building addition caused substantial injury to the plaintiff. The plaintiff's property consisted of three industrial buildings and an office building. An easement entitled plaintiff to use a driveway on the adjacent lot for the ingress and egress of tractor trailers. Defendants built a large store on the unimproved adjacent lot, and raised the level of the property, making it impossible to maneuver tractor trailers through the driveway. Therefore the court remitted the action for a new trial in order for the defendant to have the opportunity to introduce new evidence. The court stated that, barring such evidence, an injunction should issue

When Performing Easement Agreement Is Impossible, Dominant Owner May Not Collect Damages

Chateau Rive Corp. v. Enclave Development Associates

NYLJ 10/11/02, p. 40, col. 3

AppDiv, Second Dept

(memorandum opinion)

In an action by dominant owner for specific performance of an agreement by servient owner to build a road, and for declaratory and injunctive relief, both parties appealed from a Supreme Court judgment denying specific performance but awarding dominant owner $1,821,177 in damages. The Appellate Division reversed and awarded servient owner summary judgment dismissing the complaint, holding that servient owner was not liable for damages because performance was impossible.

Servient owner entered into a written, recorded, agreement granting dominant owner's predecessor an easement across its land and obligating servient owner to build a paved road, with appurtenant utility lines, connecting the dominant parcel with a public road. The paved road was to be build through an adjacent municipally-owned lot. Dominant owner purchased its parcel, and then brought this action seeking specific performance and damages resulting from servient owner's breach. The Supreme Court initially granted summary judgment to dominant owner, but the Appellate Division, in a related case, subsequently determined that the municipally-owned lot had been impliedly dedicated as a public park. The Supreme Court, on renewal, then denied dominant owner's summary judgment motion on its claim for specific performance, but adhered to its prior determination on the claims for declaratory relief and damages. After a nonjury trial, The Supreme Court awarded damages.

In reversing the award of damages, the Appellate Division held that its prior determination that the municipally owned land was public parkland made servient owner's construction of the road impossible. Moreover, because performance was impossible when the contract was made, the contract was executed under a mutual mistake of fact, and was therefore voidable. As a result, servient owner could not be declared in breach of the covenant, and could not be held liable for damages or delay in constructing the road. As a result, servient owner was entitled to summary judgment dismissing the complaint.

Mortgagee Who Dispenses Money to Persons Other Than Corporate Mortgagor, Bank Risks Fraudulent Transfer Liability

Vazquez v. Riaz

NYLJ 9/21/05, p. 19, col. 3

Supreme Ct., Kings Cty

(Schmidt, J.).

In an action by judgment creditors to set aside a mortgage as a fraudulent conveyance, mortgagee bank moved to dismiss the complaint. The court denied mortgagee's motion, holding that questions of fact remained about whether the bank had notice of the creditors' claim, and about whether the bank gave fair consideration for the mortgage.

In 2000, plaintiffs in this action brought a personal injury action against corporate mortgagor. Two years later, mortgagor entered into a mortgage agreement with mortgagee bank. The bank took back a mortgage to secure a commercial loan of $499,000. President of the corporate mortgagor executed a personal guarantee of the loan. About three quarters of the loan proceeds were paid to the president of the corporate mortgagor or the president's wife; only about one-quarter of the proceeds was paid to the corporate mortgagor. In conjunction with the mortgage transaction, corporate mortgagor's counsel executed an “opinion letter” in which he stated that “[t]o our knowledge, there are no proceedings pending or threatened before any court … which will adversely affect the financial condition or operations of the Borrower or the Guarantor.” After plaintiffs received a substantial award in their personal injury action, they brought this action to set aside the mortgage as a fraudulent conveyance. Mortgagee bank moved to dismiss, contending that it had no knowledge of the personal injury action, and that it paid fair consideration for the mortgage.

In denying mortgagee bank's motion to dismiss, the court started by noting the mortgagor's clear intent to delay, hinder, or defraud its future creditors. The court acknowledged that mortgagor's opinion letter showed that mortgagor and its counsel were untruthful, but held that the documents did not conclusively demonstrate that the bank had no actual or constructive notice of the lawsuit. Moreover, the court observed that even if the bank had no notice of the lawsuit, the bank could avoid fraudulent conveyance law only if the bank could establish that it gave fair consideration. In the court's view, one element of fair consideration is good faith. Here, because so little of the mortgage money was dispensed to the corporate mortgagor, the court concluded that questions of fact remained about whether the bank made the transaction in good faith. As a result, the bank was not entitled to dismissal of the claim.

COMMENT

Debtor and Creditor Law section 278 invalidates a fraudulent conveyance, “against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser.” (emphasis added).

The Second Circuit has held that a transferee for adequate consideration is not protected against a fraudulent transfer claim when the transferee is aware of facts that should have led him to make further inquiries, but fails to make those inquiries. In HBE Leasing Corp. v. Frank, 48 F.3d 623, the transferee knew that the debtor corporation was on trial in a RICO action and that it had received large loans from its majority stockholder. Because the transferee did not make reasonable inquiries into the use of the mortgage proceeds, transferee was not protected against a fraudulent conveyance claim

The duty to inquire does not extend to a mortgagee who, in his normal course of conduct, has discovered no suspicious facts. Thus, in Morse v. Howard Park Corp., 50 Misc. 2d 834, the mortgagor's tenants changed their credit structure in an effort to eliminate their equity in the building they had built. Plaintiffs executed a mortgage with the landlord, which helped the tenants reduce their equity. The tenants' bondholders sought to set aside the mortgage, but the court emphasized that the mortgagee had uncovered no suspicious facts. Furthermore, the court held that the mortgagee's relationship with the tenants was too attenuated to require mortgagee to examine the tenants' credit structure in relation to the bondholders.

A mortgagee's duty to inquire is triggered, however, when the mortgagee lends with knowledge that occupancy of the mortgaged property is inconsistent with record title, or when the terms of the mortgage are so advantageous to suggest potential fraud. In United States v. Orozco-Prada 636 F. Supp 1537, Orozco was charged with money laundering, but before the government had the right to seize his property, Orozco conveyed it to Ballestas. Ballestas subsequently obtained a mortgage on the property. The court held that mortgagee was not protected against the government's claim to the property because the mortgagee had visited the property and discovered that Orozco's occupancy was inconsistent with Ballestas' record ownership. This discovery triggered a duty to inquire, and because the mortgagee had failed to make inquiry, mortgagee was held to have constructive knowledge of the fraud. The court added that the terms of the mortgage were also suspicious, because they were particularly advantageous to the lender. These terms, on their own, would have been sufficient to require the mortgagee to make additional inquiry.