Real Property Law

AppDiv, Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, subsequent purchaser appealed from the Supreme Court's award of summary judgment to mortgagee. The Appellate Division affirmed, holding that purchaser could not claim bona fide purchaser status.

Parnes gave a mortgage on the property to Florida Bank. That mortgage was recorded in 2004. On Oct. 11, 2005, Parnes conveyed the premises to Alphonso for $600,000. Parnes used $416,627.11 of the proceeds to pay off the Florida Bank mortgage. Florida Bank executed a satisfaction on Oct. 27. Meanwhile, to finance his purchase, Alphonso took out a $480,000 mortgage from Encore on Oct. 11, the date of Alphonso's purchaser from Parnes. Then, on Nov. 7, Alphonso conveyed the property to Point for $20,000. Point recorded the deed on Nov. 10. On that date, neither the deed to Alphonso, nor the Encore mortgage, nor the Florida Bank satisfaction had yet been recorded. Subsequently, the deed to Alphonso and the Encore mortgage were both recorded on Nov. 21, and the Florida Bank satisfaction was recorded on Dec. 9. In June 2006, Encore assigned its mortgage to HSBC, and HSBC recorded the assignment the following month. HSBC then brought this action to foreclose its mortgage, and Point contended that it enjoyed priority over the HSBC mortgage. The Supreme Court awarded summary judgment to HSBC, and Point appealed.

In affirming, the court held that Point was not a bona fide purchaser. First, the court suggested that Point was chargeable with constructive notice of the Encore mortgage, The court noted that at the time Point took title, Alphonso had not yet recorded his deed, so that the person with record title (Parnes) was not the person in possession (Alphonso). The court held that this discrepancy imposed a duty to inquire on Point, and held that because an inquiry would have revealed the true state of title, including the Encore mortgage, Parnes was on constructive notice of that mortgage. Second, the court concluded that Point could not be a bona fide purchaser because he paid only $20,000 for property appraised at $600,000. The court indicated that payment of a nominal sum was not sufficient to confer bona fide purchase status on a transferee. As a result, mortgagee HSBC was entitled to summary judgment in its foreclosure action.

COMMENT

When a transferee pays only a nominal sum for a interest in real property, that nominal sum does not constitute “valuable consideration” within the meaning of the recording act (Real Property Law section 291). As a result, the transferee cannot obtain the protection the recording act provides to a bona fide purchaser. Real Property Law ' 291 provides protection only to a , transferee “in good faith and for valuable consideration.” In Ten Eyck v. Witbeck, 135 N.Y. 40 (1892), the court held that consideration of ten dollars paid by defendant to her father for property worth $20,000, was not valuable consideration within the meaning of the statute.

The court in Ten Eyck, however, was careful not to hold that a purchaser must pay market value in order to satisfy the “valuable consideration” requirement of the recording statute. But the court indicated that when consideration is more than nominal, but nevertheless “grossly disproportionate” to the property's market value, the disparity between the consideration and the market value may prevent the purchaser from satisfying the separate “good faith” requirement of the recording statute. The court reasoned that a significant disparity “is strong proof of a defective title and sufficient to put a prudent man upon inquiry, and if the buyer neglects to diligently prosecute such inquiry, he may not be awarded the standing of a bona fide purchaser.” Id. at 46 (emphasis in original).

On facts similar to the Alphonso case, the court in Ochenkowsky v. Dunaj, 244 N.Y.S. 267, aff'd., 251 N.Y.S. 589 (3rd Dept. 1931), applied the language in Ten Eyck and held that transferee's acquisition of property for half its value, “if defendant's evidence was [even] true”, was in itself a suspicious circumstance “singularly inconsistent with the probability of good faith” and should have put defendant on inquiry notice. The court relied on the gross inadequacy of the purchase price, among other factors, in holding that transferee was not a bona fide purchaser.

Equitable Subrogation Protects Mortgagee Who Did Not Timely Record

Surace v. Stewart

NYLJ 1/26/09, p. 35, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action for a declaration that plaintiff mortgagee held an equitable first mortgage lien, subsequent mortgagee appealed from the Supreme Court's declaration that mortgagee was equitably subrogated to a mortgage paid off with funds advanced by plaintiff mortgagee. The Appellate Division affirmed, holding that the plaintiff mortgagee was subrogated to the rights of the prior mortgagee whose mortgage was satisfied with plaintiff mortgagee's funds. Stewart gave plaintiff mortgagee a mortgage in the sum of $360,000 on April 5, 2005. About $265,000 of that sum was used to satisfy a prior mortgage secured by the same property. On July 14, 2005, subsequent mortgagee took a mortgage from Stewart in the sum of $200,000. Subsequent mortgagee recorded the mortgage on Aug. 1, 2005, well before plaintiff mortgagee recorded its mortgage, on Jan. 30, 2006. In this action, plaintiff mortgagee and subsequent mortgagee each claim priority with respect to the secured property. Supreme Court held that plaintiff mortgage should be equitably subrogated to the initial mortgage to the extent of $265,000. Subsequent mortgagee appealed.

In affirming, the court noted that the subsequent mortgage did not exist at the time the prior mortgage was satisfied, and held that plaintiff mortgagee should be equitably subrogated to the extent that proceeds from plaintiff's mortgage was used to satisfy the prior mortgage. The court also held that the equitable lien encumbered the entire property.

COMMENT

The doctrine of equitable subrogation applies “where the funds of a mortgagee are used to satisfy the lien of an existing, known incumbrance when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds.” King v. Pelkofski, 20 N.Y.2d 326, 333-334. In Pelkofski, plaintiff's mortgage was never signed by mortgagor's wife despite a previously recorded document in which mortgagor agreed to execute no agreements regarding the property without the wife's consent. The court held that plaintiff mortgagee was protected by equitable subrogation to the extent that liens of certain prior creditors were discharged out of the funds lent by plaintiff, and that plaintiff was entitled to a priority for the amounts of taxes and fire insurance premiums paid either directly by plaintiff mortgagee or from the proceeds of her loan. The court emphasized that the discharge of these obligations directly benefitted mortgagor's wife, because the obligations were the responsibility of both the mortgagor and the wife. Equitable subrogation prevents unjust enrichment ' otherwise, the party opposed to equitable subrogation would obtain a windfall by obtaining a first lien on the property that it would not have but for the satisfaction of the prior mortgage. See Id. Equitable subrogation does not diminish the interest of the party opposed to equitable subrogation because its position is preserved; the identify of the senior lienholder may be different, but the value of the lien is the same.

A number of Second Department cases have held that where the lender seeking equitable subrogation had actual or constructive knowledge of an intervening lien at the time it advanced funds to the borrower, the lender is not entitled to equitable subrogation. For instance, in R.C.P.S. Assoc. v. Karam Devs., 238 A.D.2d 492, 493, the court held that plaintiff mortgagee, whose funds were used to pay off a purchase-money mortgage was not protected by equitable subrogation because plaintiff had record notice of the intervening lien. See also Pawling Sav. Bank v. Hunt Props., 225 A.D.2d 678, 680 (holding that plaintiff mortgagee was not protected by equitable subrogation because it had record notice of the other lien despite its mistaken belief, based upon a inapplicable subordination clause, that it would acquire superior lien status). Bank One v. Mui, 38 AD3d 809, 812 (holding that equitable subrogation did not protect a mortgagee against a lender of whose mortgage lender had record notice).

These cases are inconsistent with the holding in King v. Pelkofski itself, because in that case, the Court of Appeals applied equitable subrogation principles even though the intervening interest ' the document in which the husband agreed to make no agreements without his wife's consent ' was properly recorded, putting the plaintiff mortgagee on constructive notice of the wife's interest. Aside from inconsistency with King v. Pelkofski, it is unclear why the lender's knowledge of the other lien should matter. One possible rationale for the Second Department's position is that a lender is entitled to the protection of equitable subrogation only if it comes before the court with “clean hands” ' in other words, equity does not protect a lender who had notice of a prior lien and therefore could have protected itself at law by means of a subordination agreement.

In Surace, the intervening interest was recorded after the subsequent mortgage loan was made, but before the subsequent mortgage was recorded. Thus, even under the Second Department rule, the the subsequent mortgagee was not on constructive notice of the intervening interest at the time the loan was made.

Former Owner Not Entitled To Post-Foreclosure Relief Against Bona Fide Mortgagee

Wells Fargo Bank, NA v. Edsall

NYLJ 1/30/09, p. 28, col. 1

Supree Ct., Suffolk Cty

(Whelan, J.)

In a mortgage foreclosure action, defendant, an occupant and former owner of the property, sought an order staying all proceedings and dismissing the complaint. The court denied the motion, holding that former owner, who had defaulted in the foreclosure action, was not entitled to post-judgment relief against a bona fide mortgagee.

Former owner had defaulted on mortgages on the subject property. To deal with this difficulty, former owner conveyed the property to mortgagor, for $410,000, on March 28, 2006. Mortgagor financed the purchased with a $328,000 mortgage from mortgagee. The proceeds of the mortgage were used to pay off former owner's first mortgage loan, and, at closing, funds were also used to pay off former owner's second mortgage loan. Then, on April 7, 2006, mortgagor and former owner entered into an “occupancy agreement and repurchase option” under the terms of which former owner agreed to pay mortgagor $1,500 per month for use and occupancy, and former owner was given the right to repurchase under specified circumstances. Former owner alleges that he paid the specified use and occupancy for about eight or nine months until he suspected that mortgagor had defaulted on the subject first mortgage. When mortgagee brought this foreclosure action, mortgagee served former owner in March 2007, but former owner defaulted. On this motion, former owner sought a stay of proceedings and dismissal of the complaint, but did not demand an order vacating his default. In addition, former owner did not seek any relief against mortgagor for rescission of the transfer.

In denying former owner's motion, the court noted that former owner was seeking relief only against a mortgagee, and former owner alleged no wrongdoing by the mortgagee. The court acknowledged that if the deed to mortgagor had been forged, former owner might have a claim good even against a bona fide purchaser or encumbrancer because the deed would be void ab initio. By contrast, where, as here, a former owner alleges that a deed has been induced by fraud, the deed is only voidable, and rescission is not available against a bona fide purchaser or encumbrancer. The court went on to consider recent legislation enacted to protect homeowners against mortgage rescue scams, and concluded that none of the legislation provided former owner with a claim for relief. The court noted that the Home Equity Theft Prevention Act (RPL section 265-a) did not provide protection against bona fide purchasers, and was available only to claimants who sue within two years of the transaction. The court then indicated that relief under the Subprime Residential Loan an Foreclosure Laws (2008 Session Laws ch.472) is available only to owners, occupants, and mortgagors, and no to persons who have already conveyed their homes. The court then emphasized that former owner had never applied to vacate his default in answering, and suggested that if such an application had been made, and if former owner had offered potentially meritorious defenses against mortgagee and facially cognizable claims against mortgagor, the situation might have been different.

Subsequent Purchaser Who Paid Fraction of Property's Value Cannot Be a Bona Fide Purchaser

Mortgage Services Inc. v. Alphonso

NYLJ 1/20/09, p.35, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, subsequent purchaser appealed from the Supreme Court's award of summary judgment to mortgagee. The Appellate Division affirmed, holding that purchaser could not claim bona fide purchaser status.

Parnes gave a mortgage on the property to Florida Bank. That mortgage was recorded in 2004. On Oct. 11, 2005, Parnes conveyed the premises to Alphonso for $600,000. Parnes used $416,627.11 of the proceeds to pay off the Florida Bank mortgage. Florida Bank executed a satisfaction on Oct. 27. Meanwhile, to finance his purchase, Alphonso took out a $480,000 mortgage from Encore on Oct. 11, the date of Alphonso's purchaser from Parnes. Then, on Nov. 7, Alphonso conveyed the property to Point for $20,000. Point recorded the deed on Nov. 10. On that date, neither the deed to Alphonso, nor the Encore mortgage, nor the Florida Bank satisfaction had yet been recorded. Subsequently, the deed to Alphonso and the Encore mortgage were both recorded on Nov. 21, and the Florida Bank satisfaction was recorded on Dec. 9. In June 2006, Encore assigned its mortgage to HSBC, and HSBC recorded the assignment the following month. HSBC then brought this action to foreclose its mortgage, and Point contended that it enjoyed priority over the HSBC mortgage. The Supreme Court awarded summary judgment to HSBC, and Point appealed.

In affirming, the court held that Point was not a bona fide purchaser. First, the court suggested that Point was chargeable with constructive notice of the Encore mortgage, The court noted that at the time Point took title, Alphonso had not yet recorded his deed, so that the person with record title (Parnes) was not the person in possession (Alphonso). The court held that this discrepancy imposed a duty to inquire on Point, and held that because an inquiry would have revealed the true state of title, including the Encore mortgage, Parnes was on constructive notice of that mortgage. Second, the court concluded that Point could not be a bona fide purchaser because he paid only $20,000 for property appraised at $600,000. The court indicated that payment of a nominal sum was not sufficient to confer bona fide purchase status on a transferee. As a result, mortgagee HSBC was entitled to summary judgment in its foreclosure action.

COMMENT

When a transferee pays only a nominal sum for a interest in real property, that nominal sum does not constitute “valuable consideration” within the meaning of the recording act (Real Property Law section 291). As a result, the transferee cannot obtain the protection the recording act provides to a bona fide purchaser. Real Property Law ' 291 provides protection only to a , transferee “in good faith and for valuable consideration.” In Ten Eyck v. Witbeck, 135 N.Y. 40 (1892), the court held that consideration of ten dollars paid by defendant to her father for property worth $20,000, was not valuable consideration within the meaning of the statute.

The court in Ten Eyck, however, was careful not to hold that a purchaser must pay market value in order to satisfy the “valuable consideration” requirement of the recording statute. But the court indicated that when consideration is more than nominal, but nevertheless “grossly disproportionate” to the property's market value, the disparity between the consideration and the market value may prevent the purchaser from satisfying the separate “good faith” requirement of the recording statute. The court reasoned that a significant disparity “is strong proof of a defective title and sufficient to put a prudent man upon inquiry, and if the buyer neglects to diligently prosecute such inquiry, he may not be awarded the standing of a bona fide purchaser.” Id. at 46 (emphasis in original).

On facts similar to the Alphonso case, the court in Ochenkowsky v. Dunaj, 244 N.Y.S. 267, aff'd., 251 N.Y.S. 589 (3rd Dept. 1931), applied the language in Ten Eyck and held that transferee's acquisition of property for half its value, “if defendant's evidence was [even] true”, was in itself a suspicious circumstance “singularly inconsistent with the probability of good faith” and should have put defendant on inquiry notice. The court relied on the gross inadequacy of the purchase price, among other factors, in holding that transferee was not a bona fide purchaser.

Equitable Subrogation Protects Mortgagee Who Did Not Timely Record

Surace v. Stewart

NYLJ 1/26/09, p. 35, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action for a declaration that plaintiff mortgagee held an equitable first mortgage lien, subsequent mortgagee appealed from the Supreme Court's declaration that mortgagee was equitably subrogated to a mortgage paid off with funds advanced by plaintiff mortgagee. The Appellate Division affirmed, holding that the plaintiff mortgagee was subrogated to the rights of the prior mortgagee whose mortgage was satisfied with plaintiff mortgagee's funds. Stewart gave plaintiff mortgagee a mortgage in the sum of $360,000 on April 5, 2005. About $265,000 of that sum was used to satisfy a prior mortgage secured by the same property. On July 14, 2005, subsequent mortgagee took a mortgage from Stewart in the sum of $200,000. Subsequent mortgagee recorded the mortgage on Aug. 1, 2005, well before plaintiff mortgagee recorded its mortgage, on Jan. 30, 2006. In this action, plaintiff mortgagee and subsequent mortgagee each claim priority with respect to the secured property. Supreme Court held that plaintiff mortgage should be equitably subrogated to the initial mortgage to the extent of $265,000. Subsequent mortgagee appealed.

In affirming, the court noted that the subsequent mortgage did not exist at the time the prior mortgage was satisfied, and held that plaintiff mortgagee should be equitably subrogated to the extent that proceeds from plaintiff's mortgage was used to satisfy the prior mortgage. The court also held that the equitable lien encumbered the entire property.

COMMENT

The doctrine of equitable subrogation applies “where the funds of a mortgagee are used to satisfy the lien of an existing, known incumbrance when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds.” King v. Pelkofski, 20 N.Y.2d 326, 333-334. In Pelkofski, plaintiff's mortgage was never signed by mortgagor's wife despite a previously recorded document in which mortgagor agreed to execute no agreements regarding the property without the wife's consent. The court held that plaintiff mortgagee was protected by equitable subrogation to the extent that liens of certain prior creditors were discharged out of the funds lent by plaintiff, and that plaintiff was entitled to a priority for the amounts of taxes and fire insurance premiums paid either directly by plaintiff mortgagee or from the proceeds of her loan. The court emphasized that the discharge of these obligations directly benefitted mortgagor's wife, because the obligations were the responsibility of both the mortgagor and the wife. Equitable subrogation prevents unjust enrichment ' otherwise, the party opposed to equitable subrogation would obtain a windfall by obtaining a first lien on the property that it would not have but for the satisfaction of the prior mortgage. See Id. Equitable subrogation does not diminish the interest of the party opposed to equitable subrogation because its position is preserved; the identify of the senior lienholder may be different, but the value of the lien is the same.

A number of Second Department cases have held that where the lender seeking equitable subrogation had actual or constructive knowledge of an intervening lien at the time it advanced funds to the borrower, the lender is not entitled to equitable subrogation. For instance, in R.C.P.S. Assoc. v. Karam Devs., 238 A.D.2d 492, 493, the court held that plaintiff mortgagee, whose funds were used to pay off a purchase-money mortgage was not protected by equitable subrogation because plaintiff had record notice of the intervening lien. See also Pawling Sav. Bank v. Hunt Props., 225 A.D.2d 678, 680 (holding that plaintiff mortgagee was not protected by equitable subrogation because it had record notice of the other lien despite its mistaken belief, based upon a inapplicable subordination clause, that it would acquire superior lien status). Bank One v. Mui, 38 AD3d 809, 812 (holding that equitable subrogation did not protect a mortgagee against a lender of whose mortgage lender had record notice).

These cases are inconsistent with the holding in King v. Pelkofski itself, because in that case, the Court of Appeals applied equitable subrogation principles even though the intervening interest ' the document in which the husband agreed to make no agreements without his wife's consent ' was properly recorded, putting the plaintiff mortgagee on constructive notice of the wife's interest. Aside from inconsistency with King v. Pelkofski, it is unclear why the lender's knowledge of the other lien should matter. One possible rationale for the Second Department's position is that a lender is entitled to the protection of equitable subrogation only if it comes before the court with “clean hands” ' in other words, equity does not protect a lender who had notice of a prior lien and therefore could have protected itself at law by means of a subordination agreement.

In Surace, the intervening interest was recorded after the subsequent mortgage loan was made, but before the subsequent mortgage was recorded. Thus, even under the Second Department rule, the the subsequent mortgagee was not on constructive notice of the intervening interest at the time the loan was made.

Former Owner Not Entitled To Post-Foreclosure Relief Against Bona Fide Mortgagee

Wells Fargo Bank, NA v. Edsall

NYLJ 1/30/09, p. 28, col. 1

Supree Ct., Suffolk Cty

(Whelan, J.)

In a mortgage foreclosure action, defendant, an occupant and former owner of the property, sought an order staying all proceedings and dismissing the complaint. The court denied the motion, holding that former owner, who had defaulted in the foreclosure action, was not entitled to post-judgment relief against a bona fide mortgagee.

Former owner had defaulted on mortgages on the subject property. To deal with this difficulty, former owner conveyed the property to mortgagor, for $410,000, on March 28, 2006. Mortgagor financed the purchased with a $328,000 mortgage from mortgagee. The proceeds of the mortgage were used to pay off former owner's first mortgage loan, and, at closing, funds were also used to pay off former owner's second mortgage loan. Then, on April 7, 2006, mortgagor and former owner entered into an “occupancy agreement and repurchase option” under the terms of which former owner agreed to pay mortgagor $1,500 per month for use and occupancy, and former owner was given the right to repurchase under specified circumstances. Former owner alleges that he paid the specified use and occupancy for about eight or nine months until he suspected that mortgagor had defaulted on the subject first mortgage. When mortgagee brought this foreclosure action, mortgagee served former owner in March 2007, but former owner defaulted. On this motion, former owner sought a stay of proceedings and dismissal of the complaint, but did not demand an order vacating his default. In addition, former owner did not seek any relief against mortgagor for rescission of the transfer.

In denying former owner's motion, the court noted that former owner was seeking relief only against a mortgagee, and former owner alleged no wrongdoing by the mortgagee. The court acknowledged that if the deed to mortgagor had been forged, former owner might have a claim good even against a bona fide purchaser or encumbrancer because the deed would be void ab initio. By contrast, where, as here, a former owner alleges that a deed has been induced by fraud, the deed is only voidable, and rescission is not available against a bona fide purchaser or encumbrancer. The court went on to consider recent legislation enacted to protect homeowners against mortgage rescue scams, and concluded that none of the legislation provided former owner with a claim for relief. The court noted that the Home Equity Theft Prevention Act (RPL section 265-a) did not provide protection against bona fide purchasers, and was available only to claimants who sue within two years of the transaction. The court then indicated that relief under the Subprime Residential Loan an Foreclosure Laws (2008 Session Laws ch.472) is available only to owners, occupants, and mortgagors, and no to persons who have already conveyed their homes. The court then emphasized that former owner had never applied to vacate his default in answering, and suggested that if such an application had been made, and if former owner had offered potentially meritorious defenses against mortgagee and facially cognizable claims against mortgagor, the situation might have been different.