Real Property Law

Notice of Pendency Cancellation Conditioned on Filing of Undertaking

Kasan v. Perlin

NYLJ 2/18/09, p. 31, col. 1

Supreme Ct., Nassau Cty.

(LaMarca, J.)

In an action for a declaration that defendants hold real property in constructive trust for plaintiff, and for breach of fiduciary duty, defendants moved to cancel plaintiff's notice of pendency. The court granted defendants' motion, conditioned on defendants' filing an undertaking to cover any potential liability to plaintiff.

Plaintiff brought this action against his estranged wife and his mother-in-law. The mother-in-law had purchased the subject property in 2003 for occupation by her daughter and the daughter's two children. The daughter subsequently married plaintiff. Plaintiff alleges that he spent $200,000 improving the property at the request of his wife and mother-in-law, and alleges that wife and mother-in-law promised that mother-in-law would hold the property as trustees for wife and plaintiff, who would be the actual owners of the property. On Aug. 18, 2008, mother-in-law contracted to sell the property for $1.6 million. A week later, plaintiff brought this action for a declaration that mother-in-law held the property as trustee, and for an order directing the trustee to convey the property to him. Plaintiff also filed a notice of pendency. Mother-in-law sought to cancel the notice of pendency.

The court first agreed with plaintiff that the complaint adequately alleged the requisite elements of a constructive trust. Nevertheless, the court noted that plaintiff had not established a likelihood of success on the constructive trust claim, and concluded that equity would not permit plaintiff to prevent sale of the home during a dramatically declining market. Although the court concluded that plaintiff's constructive trust claim would ordinarily support a notice of pendency, the court also concluded that plaintiff's interest could be adequately protected by requiring defendants to file an undertaking from a corporate security in the amount of $200,000. The court concluded that plaintiff would not be able to recover more than that if the action proceeded to trial, and held that the notice of pendency should be vacated if defendants filed the undertaking.

COMMENT

A courts will uphold a notice of pendency filed in conjunction with a constructive trust claim when the claim, if successful, would result in a transfer to plaintiff of an ownership interest in specific real estate. In Jacobs v. Abramoff, 148 A.D.2d 497, an action for fraud, the court upheld a notice of pendency when the complaint alleged that defendant had bought property after taking $6,500 from plaintiff's former wife in return for a promise of a 3% interest in the property. In plaintiff's action for fraud and unjust enrichment, plaintiff sought to impose a constructive trust on his former wife's 3% interest. Since the constructive trust would have changed the state of title to the land, plaintiff was entitled to maintain a notice of pendency, because CPLR 6501 allows a plaintiff to impose notice of pendency on claims that affect “the title to, or the possession, use or enjoyment of, real property.“

Conversely, a notice of pendency will be canceled when a judgment for plaintiff on its constructive trust claim would not directly affect the title to, use, possession, or enjoyment of the real property. In Yonaty v. Glauber, 40 A.D.3d 1193, the court held that the imposition of a constructive trust on equity in an LLC whose sole asset was a piece of real estate was an insufficient basis to uphold a notice of pendency. Plaintiff alleged that although he performed services for defendant's LLC, defendant refused to give the promised equity interest in the LLC. Plaintiff sued to enforce the contract and requested that a constructive trust over the LLC be imposed. The court held that the action for an equity interest in an LLC does not directly affect title or possession of real property, even when the LLC's sole asset is real estate. The court determined that if plaintiff prevailed, his remedy would be equity in an LLC, and not title to, use, possession or enjoyment of real property. Thus, the action fell outside the scope of 6501. See also Pizzurro v. Pasquino, 201 A.D.2d 635 (canceling the notice of pendency when the plaintiff's complaint sought a constructive trust over funds diverted from a real estate company, but did not seek a constructive trust in the real estate itself).

A court will cancel a notice of pendency and substitute a security bond, at defendant's request,, when a security bond is adequate to protect plaintiff's interest or where plaintiff's likelihood of success on the merits is small. Where plaintiff seeks a definite sum of money rather than an interest in land, plaintiff is certain to be made whole if a defendant provides a security bond in the amount sought by plaintiff. Thus, in Bobash, Inc. v. Festinger, 57 A.D.3d 464, the court held that a bond was adequate since the gravamen of the fraud action, even though affecting title to real property, was to enforce a money judgment. By contrast, when plaintiff seeks title to specific real property, courts will not routinely permit defendant to substitute a security bond. In Creno v. Masterpol, 48 Misc. 2d 48, the court declined to cancel the notice of pendency in exchange for security because the plaintiff's underlying action was not for a money judgment, but for title to specific real property. However, even when the action is solely for title, a court may permit substitution of a security bond if plaintiff is unlikely to succeed on the merits of its claim. In Ansonia Realty Co. v. Ansonia Associates, 117 A.D.2d 527, the court held that plaintiff's likelihood of success in its action for specific performance action was doubtful, and therefore ordered cancellation of the notice of pendency upon defendant's substitution of a bond, in the amount of $4 million, which would have been adequate to indemnify plaintiff.

Terms of Judgment of Foreclosure Prevail over Statutory Terms

Cashin v. Simek

NYLJ 3/3/09, p. 42, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, successful bidder at the foreclosure sale appealed from a Supreme Court order requiring it to reimburse foreclosing mortgagee for real estate taxes paid on the subject property. The Appellate Division affirmed, holding that the terms of the judgment of foreclosure required the successful bidder to pay taxes.

The terms of the judgment of foreclosure and sale, and the notice of sale, provided that the successful bidder would take the property subject to payment by that bidder of any unpaid taxes, liens or encumbrances. Successful bidder then refused to make those payments, contending that RPAPL 1354(2) requires that those payments be made out of the proceeds of the foreclosure sale. Successful bidder refused to close rather than pay the taxes, and mortgagee paid the taxes to avoid forfeiture. Mortgagee then brought this action for reimbursement, and the Supreme Court granted the motion, requiring reimbursement for payment of $61,524.95 in back real estate taxes. Successful bidder appealed.

In affirming, the Appellate Division acknowledged that RPAPL ' 1354(2) requires that taxes assessments, and water rates be paid out of the proceeds of a mortgage foreclosure sale, and that the statute was amended in 1997 to eliminate an exception in cases when “the judgment otherwise directs.” Nevertheless, the court cited authority for the proposition that when the terms of the judgment of foreclosure are clear, and impose the burden of taxes on the purchaser, those terms control. Justice McCarthy concurred, emphasizing that judgments of foreclosure should be drafted in accordance with the statute, but noting that authority supported the majority's conclusion.

COMMENT

New York courts have enforced judgments of foreclosure providing that the purchaser of foreclosed property takes the property subject to any outstanding tax liens, despite the
apparent inconsistency with RPAPL ' 1354(2), which directs that the tax liens be paid from proceeds of a foreclosure sale. In Federal Natl Mtge Assn v. Nittoli, 250 AD2d 427, the First Department denied the purchaser's request to set aside the foreclosure sale, and enforced the terms of the judgment of foreclosure, which provided that the sale would be subject to unpaid taxes and assessments, The Second Department reached the same conclusion in Merrill Lynch Credit Corp. v. Averell 283 A.D.2d 618, enforcing the terms of a judgment of foreclosure and sale, which ordered the property sold subject to tax liens. In both cases, the court justified the decisions to follow the terms of judgment, and to ignore the statute, by emphasizing that the purchasers had notice that they would be responsible for the unpaid taxes.

When the terms of the judgment of foreclosure include inconsistent terms, some of which are consistent with the statute and some which are not, at least one court has vacated the sale and required a resale. Thus, in Fleet Finance, Inc. v. Gillerson, 277 AD2d 279, the Second Department set aside a foreclosure sale where one provision of the 1994 foreclosure judgment stated that all tax liens existing at the time of sale would be paid from sale proceeds, while another stipulated that the property would be sold subject to tax liens. In vacating the sale, the court emphasized that the inconsistent provisions of the judgment of foreclosure, and the 1997 amendment to ' 1354(2), caused the parties to have differing beliefs regarding the payment of tax liens.

When the terms of a foreclosure judgment conform to RPAPL ' 1354(2), they control even when terms of sale provide otherwise. In Bank of New York v. Love, 3 A.D.3d 303, when the terms of a judgment directed that the proceeds from the sale be used to pay tax liens of the foreclosed property, while the terms of sale stated that unpaid liens at the time of sale must be paid by the purchaser prior to the closing date, the court held that terms of judgment trumped the terms of sale, effectively enforcing the outcome mandated by the statute.

Notice of Pendency Cancellation Conditioned on Filing of Undertaking

Kasan v. Perlin

NYLJ 2/18/09, p. 31, col. 1

Supreme Ct., Nassau Cty.

(LaMarca, J.)

In an action for a declaration that defendants hold real property in constructive trust for plaintiff, and for breach of fiduciary duty, defendants moved to cancel plaintiff's notice of pendency. The court granted defendants' motion, conditioned on defendants' filing an undertaking to cover any potential liability to plaintiff.

Plaintiff brought this action against his estranged wife and his mother-in-law. The mother-in-law had purchased the subject property in 2003 for occupation by her daughter and the daughter's two children. The daughter subsequently married plaintiff. Plaintiff alleges that he spent $200,000 improving the property at the request of his wife and mother-in-law, and alleges that wife and mother-in-law promised that mother-in-law would hold the property as trustees for wife and plaintiff, who would be the actual owners of the property. On Aug. 18, 2008, mother-in-law contracted to sell the property for $1.6 million. A week later, plaintiff brought this action for a declaration that mother-in-law held the property as trustee, and for an order directing the trustee to convey the property to him. Plaintiff also filed a notice of pendency. Mother-in-law sought to cancel the notice of pendency.

The court first agreed with plaintiff that the complaint adequately alleged the requisite elements of a constructive trust. Nevertheless, the court noted that plaintiff had not established a likelihood of success on the constructive trust claim, and concluded that equity would not permit plaintiff to prevent sale of the home during a dramatically declining market. Although the court concluded that plaintiff's constructive trust claim would ordinarily support a notice of pendency, the court also concluded that plaintiff's interest could be adequately protected by requiring defendants to file an undertaking from a corporate security in the amount of $200,000. The court concluded that plaintiff would not be able to recover more than that if the action proceeded to trial, and held that the notice of pendency should be vacated if defendants filed the undertaking.

COMMENT

A courts will uphold a notice of pendency filed in conjunction with a constructive trust claim when the claim, if successful, would result in a transfer to plaintiff of an ownership interest in specific real estate. In Jacobs v. Abramoff, 1 48 A.D.2d 497, an action for fraud, the court upheld a notice of pendency when the complaint alleged that defendant had bought property after taking $6,500 from plaintiff's former wife in return for a promise of a 3% interest in the property. In plaintiff's action for fraud and unjust enrichment, plaintiff sought to impose a constructive trust on his former wife's 3% interest. Since the constructive trust would have changed the state of title to the land, plaintiff was entitled to maintain a notice of pendency, because CPLR 6501 allows a plaintiff to impose notice of pendency on claims that affect “the title to, or the possession, use or enjoyment of, real property.“

Conversely, a notice of pendency will be canceled when a judgment for plaintiff on its constructive trust claim would not directly affect the title to, use, possession, or enjoyment of the real property. In Yonaty v. Glauber, 40 A.D.3d 1193, the court held that the imposition of a constructive trust on equity in an LLC whose sole asset was a piece of real estate was an insufficient basis to uphold a notice of pendency. Plaintiff alleged that although he performed services for defendant's LLC, defendant refused to give the promised equity interest in the LLC. Plaintiff sued to enforce the contract and requested that a constructive trust over the LLC be imposed. The court held that the action for an equity interest in an LLC does not directly affect title or possession of real property, even when the LLC's sole asset is real estate. The court determined that if plaintiff prevailed, his remedy would be equity in an LLC, and not title to, use, possession or enjoyment of real property. Thus, the action fell outside the scope of 6501. See also Pizzurro v. Pasquino, 201 A.D.2d 635 (canceling the notice of pendency when the plaintiff's complaint sought a constructive trust over funds diverted from a real estate company, but did not seek a constructive trust in the real estate itself).

A court will cancel a notice of pendency and substitute a security bond, at defendant's request,, when a security bond is adequate to protect plaintiff's interest or where plaintiff's likelihood of success on the merits is small. Where plaintiff seeks a definite sum of money rather than an interest in land, plaintiff is certain to be made whole if a defendant provides a security bond in the amount sought by plaintiff. Thus, in Bobash, Inc. v. Festinger, 57 A.D.3d 464, the court held that a bond was adequate since the gravamen of the fraud action, even though affecting title to real property, was to enforce a money judgment. By contrast, when plaintiff seeks title to specific real property, courts will not routinely permit defendant to substitute a security bond. In Creno v. Masterpol, 48 Misc. 2d 48, the court declined to cancel the notice of pendency in exchange for security because the plaintiff's underlying action was not for a money judgment, but for title to specific real property. However, even when the action is solely for title, a court may permit substitution of a security bond if plaintiff is unlikely to succeed on the merits of its claim. In Ansonia Realty Co. v. Ansonia Associates, 117 A.D.2d 527, the court held that plaintiff's likelihood of success in its action for specific performance action was doubtful, and therefore ordered cancellation of the notice of pendency upon defendant's substitution of a bond, in the amount of $4 million, which would have been adequate to indemnify plaintiff.

Terms of Judgment of Foreclosure Prevail over Statutory Terms

Cashin v. Simek

NYLJ 3/3/09, p. 42, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, successful bidder at the foreclosure sale appealed from a Supreme Court order requiring it to reimburse foreclosing mortgagee for real estate taxes paid on the subject property. The Appellate Division affirmed, holding that the terms of the judgment of foreclosure required the successful bidder to pay taxes.

The terms of the judgment of foreclosure and sale, and the notice of sale, provided that the successful bidder would take the property subject to payment by that bidder of any unpaid taxes, liens or encumbrances. Successful bidder then refused to make those payments, contending that RPAPL 1354(2) requires that those payments be made out of the proceeds of the foreclosure sale. Successful bidder refused to close rather than pay the taxes, and mortgagee paid the taxes to avoid forfeiture. Mortgagee then brought this action for reimbursement, and the Supreme Court granted the motion, requiring reimbursement for payment of $61,524.95 in back real estate taxes. Successful bidder appealed.

In affirming, the Appellate Division acknowledged that RPAPL ' 1354(2) requires that taxes assessments, and water rates be paid out of the proceeds of a mortgage foreclosure sale, and that the statute was amended in 1997 to eliminate an exception in cases when “the judgment otherwise directs.” Nevertheless, the court cited authority for the proposition that when the terms of the judgment of foreclosure are clear, and impose the burden of taxes on the purchaser, those terms control. Justice McCarthy concurred, emphasizing that judgments of foreclosure should be drafted in accordance with the statute, but noting that authority supported the majority's conclusion.

COMMENT

New York courts have enforced judgments of foreclosure providing that the purchaser of foreclosed property takes the property subject to any outstanding tax liens, despite the
apparent inconsistency with RPAPL ' 1354(2), which directs that the tax liens be paid from proceeds of a foreclosure sale. In Federal Natl Mtge Assn v. Nittoli, 250 AD2d 427, the First Department denied the purchaser's request to set aside the foreclosure sale, and enforced the terms of the judgment of foreclosure, which provided that the sale would be subject to unpaid taxes and assessments, The Second Department reached the same conclusion in Merrill Lynch Credit Corp. v. Averell 283 A.D.2d 618, enforcing the terms of a judgment of foreclosure and sale, which ordered the property sold subject to tax liens. In both cases, the court justified the decisions to follow the terms of judgment, and to ignore the statute, by emphasizing that the purchasers had notice that they would be responsible for the unpaid taxes.

When the terms of the judgment of foreclosure include inconsistent terms, some of which are consistent with the statute and some which are not, at least one court has vacated the sale and required a resale. Thus, in Fleet Finance, Inc. v. Gillerson, 277 AD2d 279, the Second Department set aside a foreclosure sale where one provision of the 1994 foreclosure judgment stated that all tax liens existing at the time of sale would be paid from sale proceeds, while another stipulated that the property would be sold subject to tax liens. In vacating the sale, the court emphasized that the inconsistent provisions of the judgment of foreclosure, and the 1997 amendment to ' 1354(2), caused the parties to have differing beliefs regarding the payment of tax liens.

When the terms of a foreclosure judgment conform to RPAPL ' 1354(2), they control even when terms of sale provide otherwise. In Bank of New York v. Love, 3 A.D.3d 303, when the terms of a judgment directed that the proceeds from the sale be used to pay tax liens of the foreclosed property, while the terms of sale stated that unpaid liens at the time of sale must be paid by the purchaser prior to the closing date, the court held that terms of judgment trumped the terms of sale, effectively enforcing the outcome mandated by the statute.