Real Property Law

Title Holder With Knowledge of Prior Mortgage Not a Bona Fide Purchaser

1.2.3. Holding Corp. v. Exeter Holding, Ltd.

NYLJ 10/17/08, p. 32, col. 3

Supreme Ct., Suffolk Cty

(Doyle, J.)

In an action by record title holder to cancel a mortgage executed by a prior predecessor in interest, mortgagee moved for summary judgment dismissing the complaint and declaring the mortgagee's interest superior to that of the record title holder. The court awarded summary judgment to mortgagee, holding that title holder had knowledge of the mortgage, and could not claim protection as a bona fide purchaser.

Mortgagor Millenium and AFC Real Estate purchased the subject premises in June 2005 as part of a joint venture to build a single-family home for resale purposes. On Aug. 5, 2005, Millenium then borrowed money from mortgagee Exeter, giving Exeter a mortgage. Exeter did not record the mortgage until May 30, 2006. Meanwhile, Millenium conveyed its interest in the property to AFC on April 7, 2006, and AFC in turn conveyed its interest to 1.2.3. Holding on May 6 “for ten dollars and valuable consideration.” 1.2.3 Holding recorded its deed on May 17, 2006 ' 13 days before mortgagee recorded its mortgage. Alan Kaspar was apparently a principal both in AFC and in 1.2.3., and signed the deed from AFC to 1.2.3. as “secretary” of 1.2.3. On these facts, 1.2.3. brought this action to cancel Exeter's mortgage.

In awarding summary judgment to mortgagee Exeter, the court noted that New York is a race-notice jurisdiction, and that 1.2.3. as a subsequent purchaser who has recorded first would enjoy priority over Exeter unless 1.2.3 had actual knowledge of Exeter's interest. The court acknowledged that Exeter's mortgage could only encumber Millenium's interest in the property. But the court then held that 1.2.3 could not acquire bona fide purchase status, noting that Kasper had executed an agreement agreeing to assume responsibility for a mortgage to Exeter Bank, and concluding that it strained credulity that in light of execution of this agreement, Kasper did not have knowledge of the Exeter mortgage. In light of this knowledge, Exeter enjoyed priority over 1.2.3. even if the initial mortgage only burdened Millenium's one-half of the subject property.

COMMENT

A mortgage given by one of several co-owners, without the consent of the others, is not invalid but in the case of a default, foreclosure would only be available against the conveying mortgagor's interest in the property. In V.R.W., Inc. v. Klein, 503 N.E.2d 496, the Court of Appeals held that a mortgage encumbered only the husband's interest in the property and not his ex-wife's when the husband, during the marriage, had forged his wife's signature on a mortgage agreement. As a result, the mortgagee could only foreclose on the husband's interest in the property and the subsequent purchaser would acquire all of the rights of an ordinary tenant in common, including the right to seek partition.

A co-owner who did not consent to a mortgage agreement cannot be held personally liable either. In Kwang Hee Lee v. Adjmi 936 Realty Assoc., 34 A.D.3d 646, the Appellate Division held that a co-owner could not be held personally liable for the additional indebtedness secured by a mortgage placed on the property when his signature was forged by the mortgagor on the mortgage agreement.

It appears that when a co-owner ratifies a mortgage after the fact, the mortgage encumbers the co-owner's interest. In Northgate Elec. Profit Sharing Plan v. Hayes, 210 A.D.2d 384, an estranged wife and her boyfriend forged her husband's signature on a mortgage agreement. The Appellate Division held that since there was no evidence that the husband knew of the forgery or ratified his wife's actions, the mortgage was not effective as a conveyance of his interest in the property. The court's discussion suggests that if the husband had ratified his wife's action, the mortgage would have been effective against him.

Question of Fact Precludes Summary Judgment on Cancellation of Contract Pursuant to Mortgage Continency Clause

Dazzo v. Kilcullen

NYLJ 11/10/08, p. 31, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action by contract vendee for return of a down payment, contract vendee appealed from the Supreme Court's award of summary judgment to seller. The Appellate Division modified to deny summary judgments to both parties, holding that a question of fact remained about whether contract vendee's cancellation pursuant to the contract's mortgage contingency clause was timely. The pre-printed contract of sale included a mortgage contingency clause that permitted contract vendee to cancel and obtain return of the down payment if contract vendee were unable to obtain a mortgage within “forty-five days of the date hereof.” The contract further required contract vendee to give notice of cancellation within five days of the expiration of the 45-day period. A handwritten provision added to the contract of sale, however, provided that “[a]ll time periods shall run from date Purchasers' attorney receives 2 fully executed copies of contract.”

Contract vendee failed to obtain a mortgage commitment, and provided notice to seller more than 50 days after the date of the contract. When contract vendee brought this action for return of the down payment, contract vendee sought summary judgment. The Supreme Court searched the record and awarded summary judgment to seller, relying on the time limit in the sale contract. In modifying, the Appellate Division emphasized that when the terms of a preprinted contract conflict with a handwritten addition, the handwritten provision generally controls. As a result, the Supreme Court improperly awarded summary judgment to seller. But the court noted that contract vendee had offered no evidence of the date on which purchasers' attorney received two executed copies of the sale contract. As a result, contract vendee had not established an entitlement to summary judgment.

Title Holder With Knowledge of Prior Mortgage Not a Bona Fide Purchaser

1.2.3. Holding Corp. v. Exeter Holding, Ltd.

NYLJ 10/17/08, p. 32, col. 3

Supreme Ct., Suffolk Cty

(Doyle, J.)

In an action by record title holder to cancel a mortgage executed by a prior predecessor in interest, mortgagee moved for summary judgment dismissing the complaint and declaring the mortgagee's interest superior to that of the record title holder. The court awarded summary judgment to mortgagee, holding that title holder had knowledge of the mortgage, and could not claim protection as a bona fide purchaser.

Mortgagor Millenium and AFC Real Estate purchased the subject premises in June 2005 as part of a joint venture to build a single-family home for resale purposes. On Aug. 5, 2005, Millenium then borrowed money from mortgagee Exeter, giving Exeter a mortgage. Exeter did not record the mortgage until May 30, 2006. Meanwhile, Millenium conveyed its interest in the property to AFC on April 7, 2006, and AFC in turn conveyed its interest to 1.2.3. Holding on May 6 “for ten dollars and valuable consideration.” 1.2.3 Holding recorded its deed on May 17, 2006 ' 13 days before mortgagee recorded its mortgage. Alan Kaspar was apparently a principal both in AFC and in 1.2.3., and signed the deed from AFC to 1.2.3. as “secretary” of 1.2.3. On these facts, 1.2.3. brought this action to cancel Exeter's mortgage.

In awarding summary judgment to mortgagee Exeter, the court noted that New York is a race-notice jurisdiction, and that 1.2.3. as a subsequent purchaser who has recorded first would enjoy priority over Exeter unless 1.2.3 had actual knowledge of Exeter's interest. The court acknowledged that Exeter's mortgage could only encumber Millenium's interest in the property. But the court then held that 1.2.3 could not acquire bona fide purchase status, noting that Kasper had executed an agreement agreeing to assume responsibility for a mortgage to Exeter Bank, and concluding that it strained credulity that in light of execution of this agreement, Kasper did not have knowledge of the Exeter mortgage. In light of this knowledge, Exeter enjoyed priority over 1.2.3. even if the initial mortgage only burdened Millenium's one-half of the subject property.

COMMENT

A mortgage given by one of several co-owners, without the consent of the others, is not invalid but in the case of a default, foreclosure would only be available against the conveying mortgagor's interest in the property. In V.R.W., Inc. v. Klein, 503 N.E.2d 496, the Court of Appeals held that a mortgage encumbered only the husband's interest in the property and not his ex-wife's when the husband, during the marriage, had forged his wife's signature on a mortgage agreement. As a result, the mortgagee could only foreclose on the husband's interest in the property and the subsequent purchaser would acquire all of the rights of an ordinary tenant in common, including the right to seek partition.

A co-owner who did not consent to a mortgage agreement cannot be held personally liable either. In Kwang Hee Lee v. Adjmi 936 Realty Assoc., 34 A.D.3d 646, the Appellate Division held that a co-owner could not be held personally liable for the additional indebtedness secured by a mortgage placed on the property when his signature was forged by the mortgagor on the mortgage agreement.

It appears that when a co-owner ratifies a mortgage after the fact, the mortgage encumbers the co-owner's interest. In Northgate Elec. Profit Sharing Plan v. Hayes, 210 A.D.2d 384, an estranged wife and her boyfriend forged her husband's signature on a mortgage agreement. The Appellate Division held that since there was no evidence that the husband knew of the forgery or ratified his wife's actions, the mortgage was not effective as a conveyance of his interest in the property. The court's discussion suggests that if the husband had ratified his wife's action, the mortgage would have been effective against him.

Question of Fact Precludes Summary Judgment on Cancellation of Contract Pursuant to Mortgage Continency Clause

Dazzo v. Kilcullen

NYLJ 11/10/08, p. 31, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action by contract vendee for return of a down payment, contract vendee appealed from the Supreme Court's award of summary judgment to seller. The Appellate Division modified to deny summary judgments to both parties, holding that a question of fact remained about whether contract vendee's cancellation pursuant to the contract's mortgage contingency clause was timely. The pre-printed contract of sale included a mortgage contingency clause that permitted contract vendee to cancel and obtain return of the down payment if contract vendee were unable to obtain a mortgage within “forty-five days of the date hereof.” The contract further required contract vendee to give notice of cancellation within five days of the expiration of the 45-day period. A handwritten provision added to the contract of sale, however, provided that “[a]ll time periods shall run from date Purchasers' attorney receives 2 fully executed copies of contract.”

Contract vendee failed to obtain a mortgage commitment, and provided notice to seller more than 50 days after the date of the contract. When contract vendee brought this action for return of the down payment, contract vendee sought summary judgment. The Supreme Court searched the record and awarded summary judgment to seller, relying on the time limit in the sale contract. In modifying, the Appellate Division emphasized that when the terms of a preprinted contract conflict with a handwritten addition, the handwritten provision generally controls. As a result, the Supreme Court improperly awarded summary judgment to seller. But the court noted that contract vendee had offered no evidence of the date on which purchasers' attorney received two executed copies of the sale contract. As a result, contract vendee had not established an entitlement to summary judgment.