Real Property Law

Writ of Assistance Denied When Occupant Not Named in Foreclosure Action

MERS, Inc. v. Bernard

NYLJ 3/3/08, p. 20, col. 1

Supreme Ct., Nassau Cty

(Austin, J.)

After obtaining a judgment of foreclosure, mortgagee bank sought a writ of assistance to remove current occupants from the premises. The court denied the writ, holding that mortgagee bank could not obtain a writ of assistance to terminate the occupancy rights of persons not named or served as parties in the foreclosure action.

The subject premises were owned by Kesha Springer's parents. When her father died, the family had trouble making mortgage payments. As a result, Kesha Springer's mother conveyed the property to Bernard, who refinanced the property. Although Bernard owned the property, Kesha Springer's mother made the mortgage payments. When the mother defaulted, the bank foreclosed, naming Bernard and Kesha Springer as parties in the foreclosure action. The bank obtained a judgment of foreclosure and sale, and purchased the property as the successful bidder at the foreclosure sale. The bank then served a notice to quit on Bernard and Kesha Springer, indicating that they and all other occupants would face eviction if they did not deliver possession to the bank. Kesha Springer opposed the application by the bank for a writ of assistance, alleging that she, her mother, her sister, and her nephew live in the premises.

In denying the writ of assistance, the court held that a foreclosure proceeding cannot cut off the interest of an occupant of the premises not named in the foreclosure proceedings. An occupant not named in the foreclosure proceedings is not affected by the proceedings, and retains his or her possessory rights. The court held that the occupants not named in the foreclosure proceeding ' Kesha Springer's mother, sister, and nephew ' were entitled to notice and an opportunity to be heard before having their possessory rights terminated. As a result, the bank was not entitled to a writ of assistance against them.

COMMENT

A foreclosure sale purchaser may not use a writ of assistance to obtain possession from a tenant or occupant not named as a party in the foreclosure proceeding. Thus, in Green Point Savings Bank v. DeFour, 162 Misc. 2d 476, the court held that mortgagee bank, who had foreclosed on the subject property, was not entitled to a writ of assistance for removal of a tenant who was not named as a party to the mortgage foreclosure action. The court held that the tenant was not bound by the foreclosure proceeding, and could not, therefore, be subject to a writ of assistance.

Enforcement of a writ of assistance against one who was not joined as a party to the foreclosure proceeding would violate due process because the person named in the writ would not have had an opportunity to be heard before loss of any interest he might have in the property. Thus, in Mortgage Electronic Registration Systems, Inc. v. Anuforo, 15 Misc.3d 1124(A), the court denied a writ of assistance to a foreclosure sale purchaser who sought to remove the mortgagor's sister and son from the premises. Because the mortgagee had not named the sister and son as defendants in the foreclosure action, the court held that the foreclosure judgment could not extinguish their interest in the premises.

A purchaser of a foreclosure property may, however, initiate an ejectment action to remove tenants or occupants not joined in the foreclosure proceeding. Thus, in Joseph v. Whitcombe, 279 A.D. 2d 122, the Crystal Waterview Corp. acquired a property through a foreclosure sale and commenced an ejectment action to remove occupants from the premises. The occupants asserted a counterclaim that they acquired the property through adverse possession. The court granted the order of ejectment and rejected the defendants' counterclaim. Unlike the writ of assistance, the ejectment action does not violate due process because the party named in the ejectment action has an opportunity to present a subsequent defense.

Similarly, the purchaser of the foreclosure property may terminate the tenant's or occupant's interest by commencement of a strict foreclosure action pursuant to RPAPL '1352 or a reforeclosure action pursuant to RPAPL '1503. Thus, in 6820 Ridge Realty LLC v. Goldman, 263 A.D. 2d 22, the court held that the purchasers of an apartment building from a foreclosure sale were entitled to maintain a strict foreclosure action to cut off the leasehold rights of commercial tenants who were not joined in the original foreclosure suit. The strict foreclosure action allows the purchaser to dispose of encumbrances resulting from those whose interests were inferior at time of the original foreclosure but who were not joined as parties to that action.

 

Subsequent Mortgagees Not On Inquiry Notice of Unrecorded Mortgage

Washington Mutual Bank, FA v. Peak Health Club, Inc.

NYLJ 3/3/08, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In two mortgage foreclosure actions, Washington Mutual, holder of a prior mortgage, appealed from the Supreme Court's grant of summary judgment awarding priority to Merrill Lynch, a subsequent mortgagee. The Appellate Division affirmed, holding that Merrill Lynch enjoyed priority as a subsequent mortgagee who first recorded its mortgage lien.

Washington Mutual's predecessor lent $3,250,000 to East Coast, operator of a health club located on premises owned by Peak. East Coast and Peak were both corporate entities owned by Marshel. As part of Washington Mutual's loan transaction, the bank required Peak to convey the premises to East Coast. The loan was to be secured by a mortgage, and the mortgage agreement required Marshel to record the mortgage and Peak's deed to East Coast, and further provided that failure to do so would be an event of default. The agreement also prohibited Marshel from conveying or mortgaging the premises without Washington Mutual's consent. Marshel executed the note as 'Principal of Maker' and the mortgage as 'Principal of Mortgagor.' The mortgage agreement provided that any principal of the mortgagor would be personally liable for any events of default. Marshel never recorded the deed or the Washington Mutual mortgage. Marshel later sold his interest in Peak and East Coast to Paragon Resorts. Marshel never informed Washington Mutual about the sale. Later Peak, under its new ownership, borrowed money from A & N, giving A & N a mortgage on the premises. Still later, Peak borrowed more than $5,000,000 from Merrill Lynch, using part of the proceeds to pay off the A & N loan. Peak gave Merrill Lynch a mortgage on the premises. Peak recorded both the A & N mortgage and the Merrill Lynch mortgage.

Subsequently, Washington Mutual learned of the A & N and Merrill Lynch mortgages. Washington Mutual then recorded its own mortgage, and brought an action to foreclose, alleging that an event of default had occurred. In the course of that proceeding, Supreme Court awarded summary judgment to A & N and Merrill Lynch, holding that their mortgages were superior to the Washington Mutual Mortgage. Washington Mutual appealed.

In affirming, the Appellate Division noted that A & N and Merrill Lynch had established that they gave valuable consideration for their mortgages, that they had no notice of the earlier Washington Mutual mortgage, and that they had first recorded. The court also noted that A & N had conducted title searches that indicated the Peak owned the subject premises, and that there were no encumbrances on the premises. As a result, the court rejected Washington Mutual's contention that the subsequent mortgagees were on inquiry notice of the Washington Mutual mortgage. As a result, A & N and Merrill Lynch were entitled to priority under New York's recording statute. Finally, the court awarded summary judgment to Washington Mutual against Marshel, holding that Marshel was personally liable for the amounts due under the note.

COMMENT

A subsequent purchaser or mortgagee is held to be on 'inquiry notice' of a prior unrecorded interest when the facts before that subsequent purchaser or mortgagee would lead a reasonable person to acquire about another's outstanding rights in the property. mortgage. For instance, a subsequent mortgagee or purchaser is on inquiry notice of the rights of a person in possession of the property. Thus, in Miles v. De Sapio, 96 A.D.2d 970, the existence of an occupied trailer on land over which neighbor acquired an easement was sufficient to put the neighbor on inquiry notice of the rights of occupant of the trailer. Because the neighbor made no inquiry of the trailer occupant, the neighbor's easement was subordinate to the unrecorded interest of the trailer occupant.

Similarly, if a purchaser or a mortgagee knows of the existence of an option to purchase the subject land, that knowledge imposes on the purchaser or mortgagee a duty to inquire whether the option has been exercised. Thus, in Bauer v. CS-Graces LLC, 2008 NY AppDiv LEXIS 1468, the mortgagee's attorney was aware that mortgagor had conveyed an option to purchase 60% of the property. When mortgagee relied on assurances from mortgagor's lawyer that the option had not been exercised, the court held that the mortgagee's interest was nevertheless subordinate to the interest of the option holder, who had, in fact, exercised the option. The attorney's knowledge of the unrecorded option imposed on mortgagee a duty to inquire about exercise of the option, and inquiry of the mortgagor was not sufficient.

By contrast when buyer has been advised in vague terms of a prior transaction, but has been told that the transaction no longer encumbers the land, the buyer generally has no further duty to inquire. Thus, in Berger v. Polizzotto, 148 A.D.2d 651, the buyer's knowledge of a prior 'deal that broke up' was held insufficient to impose a duty to make a further inquiry. Similarly, in Washington Mutual, because no facts led the subsequent mortgagee to inquire into the existence of any interests beyond the chain of title, the court held that mortgagee had no duty to inquire.

 

No Breach of Fiduciary Duty by Lawyer Who Takes Mortgage to  Secure Client's Debt

Selby v. Stewart

NYLJ 2/27/08, p. 27, col. 1

Supreme Ct., Kings Cty (Battaglia, J.)

In an action by a lawyer-mortgagee to foreclose two mortgages executed by a client, the client moved to dismiss and to vacate the mortgages. The court denied the motion, holding that the client had made no showing that the lawyer had breached her fiduciary duty in taking the mortgages.

Lawyer represented the client in two earlier foreclosure actions involving the same property. The mortgages recite a debt owed by mortgagor to the lawyer pursuant to a retainer agreement, and indicate that the mortgages were given to secure the debt. When the lawyer foreclosed, the client invoked DR-5-104 of the Code of Professional Responsibility, which prohibited a lawyer from entering into a business transaction with a client if they had differing interests in the transaction and the 'client expects the lawyer to exercise professional judgment therein for the protection of the client, unless the client has consented after full disclosure.'

In denying client's motion to dismiss, the court held that not every mortgage is rendered unenforceable by every violation of DR 5-104. In this case, the court emphasized that the client had not furnished copies of the retainer agreements that created the underlying debt, and had not alleged that he didn't understand the terms of the agreement. The court concluded, therefore, that the client had not shifted the burden of going forward to the lawyer.

 

Mortgage Forgiven Before Mortgagee's Death

Ifill v. Boyd

NYLJ 2/27/08, p. 27, col. 3

Supreme Ct., Queens Cty

(Kitzes, J.)

In an action to foreclose a mortgage, mortgagor sought summary judgment on the ground that the mortgage loan had been forgiven upon the death of the original mortgagee. The court granted the motion, concluding that mortgagor had not defaulted on the mortgage before the mortgagee's death.

A rider to the subject mortgage explicitly provide that '[t]he balance then due on the note and upon this mortgage shall be forgiven in its entirety upon the death of the mortgagee.' In 1994, original mortgagee assigned the mortgage to the current plaintiff. Mortgagor nevertheless continued to make payments to the original mortgagee until 2004, when original mortgagee took ill, and his wife advised mortgagor to suspend payments until mortgagee recovered and was able to negotiate mortgagor's checks. The original mortgagee died on Feb. 15, 2005. Current plaintiff then elected to declare the balance on the note immediately due and payable, and brought this foreclosure action.

In awarding summary judgment to mortgagor, the court concluded that the mortgage agreement gave the original mortgagee the equivalent of a life estate, which terminated at the death of the original mortgagee. The court rejected current plaintiff's argument that the mortgagor defaulted on the mortgage when he ceased making payments in 2004, noting that mortgagor had been instructed to cease payments, and that mortgagor had no notice of the assignment to current plaintiff. As a result, there was no default, and mortgagor's obligation terminated with the original mortgagee's death.

Writ of Assistance Denied When Occupant Not Named in Foreclosure Action

MERS, Inc. v. Bernard

NYLJ 3/3/08, p. 20, col. 1

Supreme Ct., Nassau Cty

(Austin, J.)

After obtaining a judgment of foreclosure, mortgagee bank sought a writ of assistance to remove current occupants from the premises. The court denied the writ, holding that mortgagee bank could not obtain a writ of assistance to terminate the occupancy rights of persons not named or served as parties in the foreclosure action.

The subject premises were owned by Kesha Springer's parents. When her father died, the family had trouble making mortgage payments. As a result, Kesha Springer's mother conveyed the property to Bernard, who refinanced the property. Although Bernard owned the property, Kesha Springer's mother made the mortgage payments. When the mother defaulted, the bank foreclosed, naming Bernard and Kesha Springer as parties in the foreclosure action. The bank obtained a judgment of foreclosure and sale, and purchased the property as the successful bidder at the foreclosure sale. The bank then served a notice to quit on Bernard and Kesha Springer, indicating that they and all other occupants would face eviction if they did not deliver possession to the bank. Kesha Springer opposed the application by the bank for a writ of assistance, alleging that she, her mother, her sister, and her nephew live in the premises.

In denying the writ of assistance, the court held that a foreclosure proceeding cannot cut off the interest of an occupant of the premises not named in the foreclosure proceedings. An occupant not named in the foreclosure proceedings is not affected by the proceedings, and retains his or her possessory rights. The court held that the occupants not named in the foreclosure proceeding ' Kesha Springer's mother, sister, and nephew ' were entitled to notice and an opportunity to be heard before having their possessory rights terminated. As a result, the bank was not entitled to a writ of assistance against them.

COMMENT

A foreclosure sale purchaser may not use a writ of assistance to obtain possession from a tenant or occupant not named as a party in the foreclosure proceeding. Thus, in Green Point Savings Bank v. DeFour, 162 Misc. 2d 476, the court held that mortgagee bank, who had foreclosed on the subject property, was not entitled to a writ of assistance for removal of a tenant who was not named as a party to the mortgage foreclosure action. The court held that the tenant was not bound by the foreclosure proceeding, and could not, therefore, be subject to a writ of assistance.

Enforcement of a writ of assistance against one who was not joined as a party to the foreclosure proceeding would violate due process because the person named in the writ would not have had an opportunity to be heard before loss of any interest he might have in the property. Thus, in Mortgage Electronic Registration Systems, Inc. v. Anuforo, 15 Misc.3d 1124(A), the court denied a writ of assistance to a foreclosure sale purchaser who sought to remove the mortgagor's sister and son from the premises. Because the mortgagee had not named the sister and son as defendants in the foreclosure action, the court held that the foreclosure judgment could not extinguish their interest in the premises.

A purchaser of a foreclosure property may, however, initiate an ejectment action to remove tenants or occupants not joined in the foreclosure proceeding. Thus, in Joseph v. Whitcombe, 279 A.D. 2d 122, the Crystal Waterview Corp. acquired a property through a foreclosure sale and commenced an ejectment action to remove occupants from the premises. The occupants asserted a counterclaim that they acquired the property through adverse possession. The court granted the order of ejectment and rejected the defendants' counterclaim. Unlike the writ of assistance, the ejectment action does not violate due process because the party named in the ejectment action has an opportunity to present a subsequent defense.

Similarly, the purchaser of the foreclosure property may terminate the tenant's or occupant's interest by commencement of a strict foreclosure action pursuant to RPAPL '1352 or a reforeclosure action pursuant to RPAPL '1503. Thus, in 6820 Ridge Realty LLC v. Goldman, 263 A.D. 2d 22, the court held that the purchasers of an apartment building from a foreclosure sale were entitled to maintain a strict foreclosure action to cut off the leasehold rights of commercial tenants who were not joined in the original foreclosure suit. The strict foreclosure action allows the purchaser to dispose of encumbrances resulting from those whose interests were inferior at time of the original foreclosure but who were not joined as parties to that action.

 

Subsequent Mortgagees Not On Inquiry Notice of Unrecorded Mortgage

Washington Mutual Bank, FA v. Peak Health Club, Inc.

NYLJ 3/3/08, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In two mortgage foreclosure actions, Washington Mutual, holder of a prior mortgage, appealed from the Supreme Court's grant of summary judgment awarding priority to Merrill Lynch, a subsequent mortgagee. The Appellate Division affirmed, holding that Merrill Lynch enjoyed priority as a subsequent mortgagee who first recorded its mortgage lien.

Washington Mutual's predecessor lent $3,250,000 to East Coast, operator of a health club located on premises owned by Peak. East Coast and Peak were both corporate entities owned by Marshel. As part of Washington Mutual's loan transaction, the bank required Peak to convey the premises to East Coast. The loan was to be secured by a mortgage, and the mortgage agreement required Marshel to record the mortgage and Peak's deed to East Coast, and further provided that failure to do so would be an event of default. The agreement also prohibited Marshel from conveying or mortgaging the premises without Washington Mutual's consent. Marshel executed the note as 'Principal of Maker' and the mortgage as 'Principal of Mortgagor.' The mortgage agreement provided that any principal of the mortgagor would be personally liable for any events of default. Marshel never recorded the deed or the Washington Mutual mortgage. Marshel later sold his interest in Peak and East Coast to Paragon Resorts. Marshel never informed Washington Mutual about the sale. Later Peak, under its new ownership, borrowed money from A & N, giving A & N a mortgage on the premises. Still later, Peak borrowed more than $5,000,000 from Merrill Lynch, using part of the proceeds to pay off the A & N loan. Peak gave Merrill Lynch a mortgage on the premises. Peak recorded both the A & N mortgage and the Merrill Lynch mortgage.

Subsequently, Washington Mutual learned of the A & N and Merrill Lynch mortgages. Washington Mutual then recorded its own mortgage, and brought an action to foreclose, alleging that an event of default had occurred. In the course of that proceeding, Supreme Court awarded summary judgment to A & N and Merrill Lynch, holding that their mortgages were superior to the Washington Mutual Mortgage. Washington Mutual appealed.

In affirming, the Appellate Division noted that A & N and Merrill Lynch had established that they gave valuable consideration for their mortgages, that they had no notice of the earlier Washington Mutual mortgage, and that they had first recorded. The court also noted that A & N had conducted title searches that indicated the Peak owned the subject premises, and that there were no encumbrances on the premises. As a result, the court rejected Washington Mutual's contention that the subsequent mortgagees were on inquiry notice of the Washington Mutual mortgage. As a result, A & N and Merrill Lynch were entitled to priority under New York's recording statute. Finally, the court awarded summary judgment to Washington Mutual against Marshel, holding that Marshel was personally liable for the amounts due under the note.

COMMENT

A subsequent purchaser or mortgagee is held to be on 'inquiry notice' of a prior unrecorded interest when the facts before that subsequent purchaser or mortgagee would lead a reasonable person to acquire about another's outstanding rights in the property. mortgage. For instance, a subsequent mortgagee or purchaser is on inquiry notice of the rights of a person in possession of the property. Thus, in Miles v. De Sapio, 96 A.D.2d 970, the existence of an occupied trailer on land over which neighbor acquired an easement was sufficient to put the neighbor on inquiry notice of the rights of occupant of the trailer. Because the neighbor made no inquiry of the trailer occupant, the neighbor's easement was subordinate to the unrecorded interest of the trailer occupant.

Similarly, if a purchaser or a mortgagee knows of the existence of an option to purchase the subject land, that knowledge imposes on the purchaser or mortgagee a duty to inquire whether the option has been exercised. Thus, in Bauer v. CS-Graces LLC, 2008 NY AppDiv LEXIS 1468, the mortgagee's attorney was aware that mortgagor had conveyed an option to purchase 60% of the property. When mortgagee relied on assurances from mortgagor's lawyer that the option had not been exercised, the court held that the mortgagee's interest was nevertheless subordinate to the interest of the option holder, who had, in fact, exercised the option. The attorney's knowledge of the unrecorded option imposed on mortgagee a duty to inquire about exercise of the option, and inquiry of the mortgagor was not sufficient.

By contrast when buyer has been advised in vague terms of a prior transaction, but has been told that the transaction no longer encumbers the land, the buyer generally has no further duty to inquire. Thus, in Berger v. Polizzotto, 148 A.D.2d 651, the buyer's knowledge of a prior 'deal that broke up' was held insufficient to impose a duty to make a further inquiry. Similarly, in Washington Mutual, because no facts led the subsequent mortgagee to inquire into the existence of any interests beyond the chain of title, the court held that mortgagee had no duty to inquire.

 

No Breach of Fiduciary Duty by Lawyer Who Takes Mortgage to  Secure Client's Debt

Selby v. Stewart

NYLJ 2/27/08, p. 27, col. 1

Supreme Ct., Kings Cty (Battaglia, J.)

In an action by a lawyer-mortgagee to foreclose two mortgages executed by a client, the client moved to dismiss and to vacate the mortgages. The court denied the motion, holding that the client had made no showing that the lawyer had breached her fiduciary duty in taking the mortgages.

Lawyer represented the client in two earlier foreclosure actions involving the same property. The mortgages recite a debt owed by mortgagor to the lawyer pursuant to a retainer agreement, and indicate that the mortgages were given to secure the debt. When the lawyer foreclosed, the client invoked DR-5-104 of the Code of Professional Responsibility, which prohibited a lawyer from entering into a business transaction with a client if they had differing interests in the transaction and the 'client expects the lawyer to exercise professional judgment therein for the protection of the client, unless the client has consented after full disclosure.'

In denying client's motion to dismiss, the court held that not every mortgage is rendered unenforceable by every violation of DR 5-104. In this case, the court emphasized that the client had not furnished copies of the retainer agreements that created the underlying debt, and had not alleged that he didn't understand the terms of the agreement. The court concluded, therefore, that the client had not shifted the burden of going forward to the lawyer.

 

Mortgage Forgiven Before Mortgagee's Death

Ifill v. Boyd

NYLJ 2/27/08, p. 27, col. 3

Supreme Ct., Queens Cty

(Kitzes, J.)

In an action to foreclose a mortgage, mortgagor sought summary judgment on the ground that the mortgage loan had been forgiven upon the death of the original mortgagee. The court granted the motion, concluding that mortgagor had not defaulted on the mortgage before the mortgagee's death.

A rider to the subject mortgage explicitly provide that '[t]he balance then due on the note and upon this mortgage shall be forgiven in its entirety upon the death of the mortgagee.' In 1994, original mortgagee assigned the mortgage to the current plaintiff. Mortgagor nevertheless continued to make payments to the original mortgagee until 2004, when original mortgagee took ill, and his wife advised mortgagor to suspend payments until mortgagee recovered and was able to negotiate mortgagor's checks. The original mortgagee died on Feb. 15, 2005. Current plaintiff then elected to declare the balance on the note immediately due and payable, and brought this foreclosure action.

In awarding summary judgment to mortgagor, the court concluded that the mortgage agreement gave the original mortgagee the equivalent of a life estate, which terminated at the death of the original mortgagee. The court rejected current plaintiff's argument that the mortgagor defaulted on the mortgage when he ceased making payments in 2004, noting that mortgagor had been instructed to cease payments, and that mortgagor had no notice of the assignment to current plaintiff. As a result, there was no default, and mortgagor's obligation terminated with the original mortgagee's death.