Real Property Law

Mortgage Broker May Owe Fiduciary Duties to Mortgagor

Iannuzzi v. Washington Mutual Bank

NYLJ 9/3/08, p. 38, col. 3

U.S. Dist. Ct., E.D.N.Y.

(Bianco, J.)

In an action by mortgagors against mortgagee bank and a mortgage broker for violations of the federal Truth in Lending Act (TILA) and for breach of fiduciary duty, mortgage broker moved to dismiss the complaint and to dismiss mortgagee's cross claims for contribution and indemnification. The court dismissed the TILA claim, but otherwise denied mortgagee's motion, holding that mortgagors had sufficiently alleged conduct establishing a fiduciary relationship with the mortgage broker.

Dawson, who had previously prepared tax returns for mortgagors, advised mortgagors to obtain a reverse mortgage, and offered to make arrangements. He introduced mortgagors to a representative of mortgage broker CCC. That representative had previously served prison terms for securities and other financial crimes. After discussions with that representative, mortgagors believed that CCC would provide a variety of services, including preparation of all applications for the reverse mortgage. Dawson and CCC advised mortgagors that they had been approved for a reverse mortgage through mortgagee, and a closing was held. Mortgagors believed they were executing documents for a reverse mortgage, but later learned that they had executed documents for a conventional mortgage for $300,000. Dawson had obtained blank signed checks from mortgagors, had arranged for the mortgage money to be deposited in mortgagors' bank account, and then wrote checks against the mortgage money before mortgagors received a statement documenting the activity. Mortgagors then brought this action against Dawson, CCC, mortgagee, and a variety of other parties. Mortgagee cross-claimed against CCC for contribution. CCC moved to dismiss the complaint, and to dismiss the cross-claims.

The court first dismissed the TILA claim against CCC, holding that even if CCC failed to provide documents required under TILA, a mortgage broker is not a creditor within the meaning of TILA. The court then acknowledged that an independent mortgage broker does not generally owe fiduciary duties to a customer, but held that mortgagors' complaint adequately alleged that CCC had acted outside the scope of an independent mortgage broker. In particular, mortgagors alleged that Dawson had acted as a disclosed or undisclosed agent of CCC, and that CCC, through its representative, had undertaken to provide services not ordinarily provided by an independent mortgage broker, including taking control of the mortgage application process and not permitting mortgagors to review their applications. The court held that these allegations were sufficient, for pleading purposes, to establish the existence of a fiduciary relationship, and to support a claim for breach of fiduciary duty. The court also held that mortgagee had adequately alleged cross-claims against CCC for common law contribution and for contractual indemnification.

Fence Built By True Owner Establishes Enclosure for Adverse Possession Purposes

Bayshore Gardens Owners Inc. v. Meersand

NYLJ 9/3/08, p. 30, col. 3

Supreme Ct., Kings Cty

(Saitta, J.)

In an action by record owners to eject adverse possessors from a triangular tract of land, both parties sought summary judgment. The court granted the summary judgment motion of adverse possessors, holding that physical enclosure and use of the tract was sufficient to establish title by adverse possession, regardless of who actually built the fence.

The disputed tract is surrounded by a fence and a gate, and adverse possessors paved the disputed area and used it as a driveway. It is not clear whether the fence and gate were constructed by the record owners or by the predecessors of the adverse possessors. Adverse possessors contend that they and their predecessors have possessed the area for more than 50 years, although adverse possessors themselves have only owned the house adjacent to the parcel since 2001. When true owners brought this action to eject adverse possessors, both parties moved for summary judgment.

In holding that adverse possessors were entitled to summary judgment, the court first held that so long as adverse possessors had been using the land without the permission of the true owners, they established the requisite hostility to support an adverse possession claim. Whether they knew that the area actually belonged to the true owner was not dispositive on the hostility of their claim. The court then indicated that enclosure of the land with a fence and gate, combined with the paving of the disputed area and use of it as a driveway, was sufficient to constitute actual possession. The court's opinion suggested that adverse possessor could satisfy the “substantial enclosure” requirement in the New York statute even if the fence had been erected by the true owner. Finally, the court held that current possessors could tack their possession on to that of their predecessors even without a deed to the disputed parcel. The court indicated that there was no question that adverse possessors' predecessors intended to turn over the disputed parcel along with the other land explicitly conveyed to them. As a result, adverse possessors had established all of the requisites of an adverse possession claim.

Government Need Not Insure Actual Receipt of Foreclosure Notice

Miner v. Clinton County

NYLJ 9/11/08, p. 29, col. 1

Second Circuit

(Opinion by Cabranes, C.J.)

In two separate actions by former landowners challenging the procedures surrounding foreclosure sale of their properties, landowners appealed from federal district court judgments dismissing their constitutional claims. The Second Circuit affirmed, holding that a government entity need not
assure that a landowner receive actual notice of a foreclosure, and that a government entity may retain any surplus value above landowner's tax liability.

Both actions challenge the procedures used by Clinton County in enforcing the foreclosure provisions of the Real Property Tax Law. In Tupaz v. Clinton County, the county sent the Tupaz landowners five letters, by first class mail, advising them of overdue taxes. All letters were sent to the address landowners had provided to the county ' an address landowners concede was the correct address. The county then sent a notice of foreclosure to the same address by certified mail, return receipt requested. The receipt was returned as delivered, with an illegible signature. When landowners failed to respond, the county brought foreclosure proceedings, which resulted in a default judgment. The Tupaz landowners subsequently brought this action challenging the constitutionality of the notice provided (although there was testimony that Tupaz admitted signing the delivery receipt). In the Miner action, receipt of notice of the foreclosure action is undisputed. The Miners, however, challenge, on constitutional grounds, the right of the county to retain any surplus resulting from foreclosure sale of their property. In each case, the district court granted summary judgment to the county, and the landowners appealed.

In affirming both judgments, the Second Circuit first rejected the contention advanced by the Tupaz landowners that the county must believe that landowners have received actual notice before the town brings foreclosure proceedings. Recognizing that a municipality must take exceptional measures to provide notice when the municipality becomes aware that its attempt at notice has failed, the court held that such measures are unnecessary when the municipality has an objectively reasonable belief that landowner has received notice. In this case, return of the receipt with an illegible signature similar to the signature returned when the county had sent prior foreclosure notices to the same landowner was sufficient to establish such a reasonable belief. The court rejected the position that return of a receipt with an illegible signature is insufficient to establish valid service. The court then held that a county is not constitutionally required to permit redemption of the property after the foreclosure deadline, and that nothing in the federal constitution prevents a municipality from retaining a surplus after a tax foreclosure proceeding so long as the municipality took adequate steps to notify the owner of the charges due and the foreclosure proceedings.

COMMENT

In Jones v. Flowers, 547 U.S. 220, the Supreme Court held that if a notice of foreclosure sent by certified mail is returned as “unclaimed” or “undeliverable” then the government “must take additional reasonable steps” to provide the taxpayer with notice before a foreclosure sale of the property. In Jones, the state sent notice to the taxpayer of foreclosure proceedings by certified mail twice, and in both instances the letters were returned “unclaimed.” Because the government actually knew that the taxpayer did not receive notice, the Court held that the government was required to take “additional reasonable steps,” which, the Court suggested, could include mailing another notice by first class mail or posting a notice on the property.

Although the court in Jones focused on the government's obligations when the government had actual knowledge that the taxpayer did not receive notice, the Second Circuit went a step further in Luessenhop v. Clinton County, 466 F.3d 259, holding that the government might have an obligation to take additional steps when the government “thought” the taxpayer did not receive notice. In Luessenhop, the Second Circuit remanded to the district court to determine whether Clinton County “thought” the Tupazes had received the notice sent by certified mail. On remand, the district court heard testimony from government officials that they had assumed the Tupazes had received the notice, and no contrary testimony. As a result, the district court awarded summary judgment to the county. On appeal, the Tupazes argued that a belief that notice by certified mail had been received is unreasonable unless the receipt is returned with an identifiable signature.

The Second Circuit in Miner agreed with the Tupazes that the county's belief that the notice had been received must be “objectively reasonable under the circumstances.” But the court concluded that it was objectively reasonable for the County to believe the Tupazes were notified of the foreclosure sale where the county had taken the following three actions: 1) it sent five earlier notices by first-class mail; 2) it noted that previous return receipts from the Tupazes had similar illegible signatures; and 3) it confirmed delivery on the Postal Service Web site. As a result, the county was not obligated to take additional steps to provide notice.

Transferor's Fraudulent Inducement Claim Survives Summary Judgment in Action Seeking Rescission

Bryan v. Lindsay

NYLJ 9/10/08, p. 28, col. 1

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

In an action by transferor of real property against transferee seeking reconveyance of the property based on fraud in the inducement, both parties sought summary judgment. The court denied both motions, holding that questions of fact required trial on whether transferee had fraudulently induced the transfer.

Transferor had fallen behind on his mortgage payments, and was facing foreclosure proceedings. He then conveyed the property to transferee on April 23, 2004, and transferee conveyed the property to third-party Ramirez on Feb. 14, 2006. Transferor contends that the transfer to transferee was made pursuant to a promise that transferee would reconvey the premises. Transferor alleged that transferee represented that he could obtain a mortgage on the premises because he had good credit, and that he would transfer the property back after securing the mortgage. Transferor was apparently not represented at the time the contract was signed or at the time of closing; transferee was represented by a lawyer who maintained offices at the same location as the mortgage broker. The lawyer was later disbarred for misconduct in other real estate matters. After the closing, transferee refused to reconvey the premises, prompting this fraud action.

In denying transferee's summary judgment motion, the court held that transferor's testimony raised questions of fact about whether transferee had made a misrepresentation of his intention for the purpose of inducing reliance by the transferor.

COMMENT

Although New York General Obligations Law '5-703 requires that contracts and conveyances concerning real property be in writing, it does not prevent an injured party from pursuing a fraud claim arising out of oral representations. In Channel Master Corp. v. Aluminum Ltd. Sales, 4 NY2d 403, 408, the Court of Appeals sustained a fraud claim against a motion to dismiss on statute of frauds grounds, noting that “[if] the proof of a promise or contract, void under the statute of frauds, is essential to maintain the action, there may be no recovery, but one who fraudulently misrepresents himself as intending to perform an agreement is subject to liability in tort whether the agreement is enforcible or not.” Channel Master Corp. v. Aluminum Ltd Sales, 4NY2d 403, 408 (NY 1958). Therefore, while the transferor in Bryan is barred by '5-703 from seeking enforcement of his oral agreement for reconveyance with the transferee, he may still obtain reconveyance by alleging fraud in the inducement. An injured party is thereby able to seek the same remedy as would have been available under '5-703, without satisfying the requirement of a writing.

New York courts have held that a claim for rescission of a contract to convey property will lie when the transferee has made a deliberate misrepresentation. In Heaven v. McGowan, 40 AD3d 583, 584-585 (2d Dept. 2007) the plaintiffs, trustees and beneficiaries of Tomlinson Living Trust (“the Trust”), were faced with a potential foreclosure of their residential property owned by the Trust. They alleged that, on the basis of oral representations made by McGowan, a lawyer who represented the trust, they entered into an agreement with him, which they believed accomplished a refinance of their mortgage on the property. However, the documents the plaintiffs signed actually effected a sale of the property to an entity created and owned by McGowan and a leaseback by the Trust at a monthly rent greater than their mortgage payments had been. The Trust sought damages for fraud, alleging that McGowan's oral mischaracterization of the transaction as a refinance induced them to transfer the property. The court found that triable issues of fact remained as to whether the attorney made the misrepresentations to mislead the Trust into entering into the transaction and as to whether the Trust justifiably relied upon those misrepresentations.

Bryan and Heaven do not, however, lead to a complete erosion of '5-703, because fraud is much harder to prove than breach of contract. In a breach of contract action, a plaintiff need only prove that the promise was not performed, while in an action for fraud, a plaintiff must prove knowing misrepresentation, intent to deceive, justifiable reliance, and injury. For instance, in Cudemo v. Al & Lou Constr. Co., 54 AD2d 995, the court overturned a jury verdict for plaintiff in a fraud case, because even if the jury believed that seller knowingly made false representations to purchaser about the size of the home's garage, purchaser could not have reasonably relied on those representations in light of the ease with which purchaser could have measured the garage. Thus, while the transferor in Bryan could not enforce his oral agreement with transferee because of the '5-703 requirement of a writing, he may still obtain a reconveyance by recharacterizing the claim as one for fraud. However, he will have a much heavier burden in proving his claim.

Mortgage Broker May Owe Fiduciary Duties to Mortgagor

Iannuzzi v. Washington Mutual Bank

NYLJ 9/3/08, p. 38, col. 3

U.S. Dist. Ct., E.D.N.Y.

(Bianco, J.)

In an action by mortgagors against mortgagee bank and a mortgage broker for violations of the federal Truth in Lending Act (TILA) and for breach of fiduciary duty, mortgage broker moved to dismiss the complaint and to dismiss mortgagee's cross claims for contribution and indemnification. The court dismissed the TILA claim, but otherwise denied mortgagee's motion, holding that mortgagors had sufficiently alleged conduct establishing a fiduciary relationship with the mortgage broker.

Dawson, who had previously prepared tax returns for mortgagors, advised mortgagors to obtain a reverse mortgage, and offered to make arrangements. He introduced mortgagors to a representative of mortgage broker CCC. That representative had previously served prison terms for securities and other financial crimes. After discussions with that representative, mortgagors believed that CCC would provide a variety of services, including preparation of all applications for the reverse mortgage. Dawson and CCC advised mortgagors that they had been approved for a reverse mortgage through mortgagee, and a closing was held. Mortgagors believed they were executing documents for a reverse mortgage, but later learned that they had executed documents for a conventional mortgage for $300,000. Dawson had obtained blank signed checks from mortgagors, had arranged for the mortgage money to be deposited in mortgagors' bank account, and then wrote checks against the mortgage money before mortgagors received a statement documenting the activity. Mortgagors then brought this action against Dawson, CCC, mortgagee, and a variety of other parties. Mortgagee cross-claimed against CCC for contribution. CCC moved to dismiss the complaint, and to dismiss the cross-claims.

The court first dismissed the TILA claim against CCC, holding that even if CCC failed to provide documents required under TILA, a mortgage broker is not a creditor within the meaning of TILA. The court then acknowledged that an independent mortgage broker does not generally owe fiduciary duties to a customer, but held that mortgagors' complaint adequately alleged that CCC had acted outside the scope of an independent mortgage broker. In particular, mortgagors alleged that Dawson had acted as a disclosed or undisclosed agent of CCC, and that CCC, through its representative, had undertaken to provide services not ordinarily provided by an independent mortgage broker, including taking control of the mortgage application process and not permitting mortgagors to review their applications. The court held that these allegations were sufficient, for pleading purposes, to establish the existence of a fiduciary relationship, and to support a claim for breach of fiduciary duty. The court also held that mortgagee had adequately alleged cross-claims against CCC for common law contribution and for contractual indemnification.

Fence Built By True Owner Establishes Enclosure for Adverse Possession Purposes

Bayshore Gardens Owners Inc. v. Meersand

NYLJ 9/3/08, p. 30, col. 3

Supreme Ct., Kings Cty

(Saitta, J.)

In an action by record owners to eject adverse possessors from a triangular tract of land, both parties sought summary judgment. The court granted the summary judgment motion of adverse possessors, holding that physical enclosure and use of the tract was sufficient to establish title by adverse possession, regardless of who actually built the fence.

The disputed tract is surrounded by a fence and a gate, and adverse possessors paved the disputed area and used it as a driveway. It is not clear whether the fence and gate were constructed by the record owners or by the predecessors of the adverse possessors. Adverse possessors contend that they and their predecessors have possessed the area for more than 50 years, although adverse possessors themselves have only owned the house adjacent to the parcel since 2001. When true owners brought this action to eject adverse possessors, both parties moved for summary judgment.

In holding that adverse possessors were entitled to summary judgment, the court first held that so long as adverse possessors had been using the land without the permission of the true owners, they established the requisite hostility to support an adverse possession claim. Whether they knew that the area actually belonged to the true owner was not dispositive on the hostility of their claim. The court then indicated that enclosure of the land with a fence and gate, combined with the paving of the disputed area and use of it as a driveway, was sufficient to constitute actual possession. The court's opinion suggested that adverse possessor could satisfy the “substantial enclosure” requirement in the New York statute even if the fence had been erected by the true owner. Finally, the court held that current possessors could tack their possession on to that of their predecessors even without a deed to the disputed parcel. The court indicated that there was no question that adverse possessors' predecessors intended to turn over the disputed parcel along with the other land explicitly conveyed to them. As a result, adverse possessors had established all of the requisites of an adverse possession claim.

Government Need Not Insure Actual Receipt of Foreclosure Notice

Miner v. Clinton County

NYLJ 9/11/08, p. 29, col. 1

Second Circuit

(Opinion by Cabranes, C.J.)

In two separate actions by former landowners challenging the procedures surrounding foreclosure sale of their properties, landowners appealed from federal district court judgments dismissing their constitutional claims. The Second Circuit affirmed, holding that a government entity need not
assure that a landowner receive actual notice of a foreclosure, and that a government entity may retain any surplus value above landowner's tax liability.

Both actions challenge the procedures used by Clinton County in enforcing the foreclosure provisions of the Real Property Tax Law. In Tupaz v. Clinton County, the county sent the Tupaz landowners five letters, by first class mail, advising them of overdue taxes. All letters were sent to the address landowners had provided to the county ' an address landowners concede was the correct address. The county then sent a notice of foreclosure to the same address by certified mail, return receipt requested. The receipt was returned as delivered, with an illegible signature. When landowners failed to respond, the county brought foreclosure proceedings, which resulted in a default judgment. The Tupaz landowners subsequently brought this action challenging the constitutionality of the notice provided (although there was testimony that Tupaz admitted signing the delivery receipt). In the Miner action, receipt of notice of the foreclosure action is undisputed. The Miners, however, challenge, on constitutional grounds, the right of the county to retain any surplus resulting from foreclosure sale of their property. In each case, the district court granted summary judgment to the county, and the landowners appealed.

In affirming both judgments, the Second Circuit first rejected the contention advanced by the Tupaz landowners that the county must believe that landowners have received actual notice before the town brings foreclosure proceedings. Recognizing that a municipality must take exceptional measures to provide notice when the municipality becomes aware that its attempt at notice has failed, the court held that such measures are unnecessary when the municipality has an objectively reasonable belief that landowner has received notice. In this case, return of the receipt with an illegible signature similar to the signature returned when the county had sent prior foreclosure notices to the same landowner was sufficient to establish such a reasonable belief. The court rejected the position that return of a receipt with an illegible signature is insufficient to establish valid service. The court then held that a county is not constitutionally required to permit redemption of the property after the foreclosure deadline, and that nothing in the federal constitution prevents a municipality from retaining a surplus after a tax foreclosure proceeding so long as the municipality took adequate steps to notify the owner of the charges due and the foreclosure proceedings.

COMMENT

In Jones v. Flowers, 547 U.S. 220, the Supreme Court held that if a notice of foreclosure sent by certified mail is returned as “unclaimed” or “undeliverable” then the government “must take additional reasonable steps” to provide the taxpayer with notice before a foreclosure sale of the property. In Jones, the state sent notice to the taxpayer of foreclosure proceedings by certified mail twice, and in both instances the letters were returned “unclaimed.” Because the government actually knew that the taxpayer did not receive notice, the Court held that the government was required to take “additional reasonable steps,” which, the Court suggested, could include mailing another notice by first class mail or posting a notice on the property.

Although the court in Jones focused on the government's obligations when the government had actual knowledge that the taxpayer did not receive notice, the Second Circuit went a step further in Luessenhop v. Clinton County, 466 F.3d 259, holding that the government might have an obligation to take additional steps when the government “thought” the taxpayer did not receive notice. In Luessenhop, the Second Circuit remanded to the district court to determine whether Clinton County “thought” the Tupazes had received the notice sent by certified mail. On remand, the district court heard testimony from government officials that they had assumed the Tupazes had received the notice, and no contrary testimony. As a result, the district court awarded summary judgment to the county. On appeal, the Tupazes argued that a belief that notice by certified mail had been received is unreasonable unless the receipt is returned with an identifiable signature.

The Second Circuit in Miner agreed with the Tupazes that the county's belief that the notice had been received must be “objectively reasonable under the circumstances.” But the court concluded that it was objectively reasonable for the County to believe the Tupazes were notified of the foreclosure sale where the county had taken the following three actions: 1) it sent five earlier notices by first-class mail; 2) it noted that previous return receipts from the Tupazes had similar illegible signatures; and 3) it confirmed delivery on the Postal Service Web site. As a result, the county was not obligated to take additional steps to provide notice.

Transferor's Fraudulent Inducement Claim Survives Summary Judgment in Action Seeking Rescission

Bryan v. Lindsay

NYLJ 9/10/08, p. 28, col. 1

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

In an action by transferor of real property against transferee seeking reconveyance of the property based on fraud in the inducement, both parties sought summary judgment. The court denied both motions, holding that questions of fact required trial on whether transferee had fraudulently induced the transfer.

Transferor had fallen behind on his mortgage payments, and was facing foreclosure proceedings. He then conveyed the property to transferee on April 23, 2004, and transferee conveyed the property to third-party Ramirez on Feb. 14, 2006. Transferor contends that the transfer to transferee was made pursuant to a promise that transferee would reconvey the premises. Transferor alleged that transferee represented that he could obtain a mortgage on the premises because he had good credit, and that he would transfer the property back after securing the mortgage. Transferor was apparently not represented at the time the contract was signed or at the time of closing; transferee was represented by a lawyer who maintained offices at the same location as the mortgage broker. The lawyer was later disbarred for misconduct in other real estate matters. After the closing, transferee refused to reconvey the premises, prompting this fraud action.

In denying transferee's summary judgment motion, the court held that transferor's testimony raised questions of fact about whether transferee had made a misrepresentation of his intention for the purpose of inducing reliance by the transferor.

COMMENT

Although New York General Obligations Law '5-703 requires that contracts and conveyances concerning real property be in writing, it does not prevent an injured party from pursuing a fraud claim arising out of oral representations. In Channel Master Corp. v. Aluminum Ltd. Sales, 4 NY2d 403, 408, the Court of Appeals sustained a fraud claim against a motion to dismiss on statute of frauds grounds, noting that “[if] the proof of a promise or contract, void under the statute of frauds, is essential to maintain the action, there may be no recovery, but one who fraudulently misrepresents himself as intending to perform an agreement is subject to liability in tort whether the agreement is enforcible or not.” Channel Master Corp. v. Aluminum Ltd Sales, 4NY2d 403, 408 (NY 1958). Therefore, while the transferor in Bryan is barred by '5-703 from seeking enforcement of his oral agreement for reconveyance with the transferee, he may still obtain reconveyance by alleging fraud in the inducement. An injured party is thereby able to seek the same remedy as would have been available under '5-703, without satisfying the requirement of a writing.

New York courts have held that a claim for rescission of a contract to convey property will lie when the transferee has made a deliberate misrepresentation. In Heaven v. McGowan, 40 AD3d 583, 584-585 (2d Dept. 2007) the plaintiffs, trustees and beneficiaries of Tomlinson Living Trust (“the Trust”), were faced with a potential foreclosure of their residential property owned by the Trust. They alleged that, on the basis of oral representations made by McGowan, a lawyer who represented the trust, they entered into an agreement with him, which they believed accomplished a refinance of their mortgage on the property. However, the documents the plaintiffs signed actually effected a sale of the property to an entity created and owned by McGowan and a leaseback by the Trust at a monthly rent greater than their mortgage payments had been. The Trust sought damages for fraud, alleging that McGowan's oral mischaracterization of the transaction as a refinance induced them to transfer the property. The court found that triable issues of fact remained as to whether the attorney made the misrepresentations to mislead the Trust into entering into the transaction and as to whether the Trust justifiably relied upon those misrepresentations.

Bryan and Heaven do not, however, lead to a complete erosion of '5-703, because fraud is much harder to prove than breach of contract. In a breach of contract action, a plaintiff need only prove that the promise was not performed, while in an action for fraud, a plaintiff must prove knowing misrepresentation, intent to deceive, justifiable reliance, and injury. For instance, in Cudemo v. Al & Lou Constr. Co., 54 AD2d 995, the court overturned a jury verdict for plaintiff in a fraud case, because even if the jury believed that seller knowingly made false representations to purchaser about the size of the home's garage, purchaser could not have reasonably relied on those representations in light of the ease with which purchaser could have measured the garage. Thus, while the transferor in Bryan could not enforce his oral agreement with transferee because of the '5-703 requirement of a writing, he may still obtain a reconveyance by recharacterizing the claim as one for fraud. However, he will have a much heavier burden in proving his claim.