Real Property Law

Scrivener's Error in Payoff Letter Subject to Correction

Aurora Loan Services LLC v. Arauz

NYLJ 10/7/09, p. 27., col. 1

Supreme Ct., Kings Cty.

(Schmidt, J.)

In a mortgage foreclosure action, mortgagor sought a preliminary injunction directing mortgagee to accept funds to pay off the mortgage in accordance with mortgagee's payoff letter, and enjoining mortgagee from foreclosing on the property. Supreme Court denied the preliminary injunction, holding that a scrivener's error in the payoff letter was subject to correction, and as a result, it was far from clear that mortgagor would ultimately prevail on the merits.

The mortgage was given to secure a $500,000 loan mortgagor had obtained from Lehman. Mortgagor defaulted on the loan on June 1, 2008. The mortgage and note were subsequently assigned to current mortgagee. Mortgagor and mortgagee began negotiations to relieve mortgagor of the mortgage debt on completion of a short sale of the secured property. Mortgagor proposed a short sale at a price of $325,000, but mortgagee allegedly rejected that price as inadequate. Mortgagor then submitted a revised contract of sale at a price of $360,000. Mortgagee contends that it internally approved sale at $360,000 on March 20, 2009. The following day, however, mortgagee faxed a payoff letter to mortgagor's lawyer stating that it had approved the sale based on a purchase price of $196,850, and that the required minimum payoff amount was $171,964.28. On May 11, mortgagee sent a similar letter with the same prices. Mortgagor then consummated sale of the property at a price of $196,850, and mortgagee received two checks from the title company totaling $171,964.28, the amount specified in the payoff letter. On June 4, mortgagee notified the title company that it would not accept that sum, and returned the two checks. Mortgagee then filed a notice of pendency and brought this foreclosure action, contending that it had agreed to a sale at $360,000, and the two faxed payoff letters were the product of a mistake. Mortgagor then moved for a preliminary injunction requiring mortgagee to accept the checks, issue a satisfaction, and stop the foreclosure proceeding.

In denying mortgagor's motion, the court noted that when parties have entered into an agreement, and when one party alleges a mistake in the reduction of that agreement to writing, the mistake may be corrected. Correction is particularly appropriate when the beneficiary of the mistake knows about the mistake and tries to take advantage of the error. Here, there is a high likelihood that mortgagor knew of the mistake, making rescission appropriate. Moreover, mortgagor did not show that he would be irreparably harmed by denial of the preliminary injunction, because any potential injury could be remedied with an award of money damages. As a result, the court concluded that mortgagor was not entitled to a preliminary injunction.

No Equitable Mortgage Without Intent to Create Security Interest

Fremont Investment & Loan v. Delsol

NYLJ 9/16/09, p. 36, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action to impose an equitable lien on real property, owner of the property appealed from a Supreme Court order imposing the lien. The Appellate Division reversed, holding that failure to establish an intent to create a security interest precluded imposition of an equitable mortgage.

Property owner held the property subject to a mortgage to secure an indebtedness that amounted to $258,750.33 at the time owner attempted to sell the property. Fremont agreed to provide a mortgage to the purchaser, and provided funds for the satisfaction of the existing mortgage by making a wire transfer to an attorney, DeGrasse, who was entrusted with receiving loan proceeds and applying them to the proper parties. De Grasse paid off the existing mortgage, obtained a satisfaction of that mortgage, disbursed some monies to property owner, and absconded with the remainder of the loan proceeds. DeGrasse never recorded a deed to the purchaser or Fremont's mortgage. As a result, property owner retained title to the subject property, but with a mortgage that had been satisfied. Fremont then brought this action to impose an equitable mortgage on the property, and Supreme Court granted summary judgment to Fremont. Property owner appealed.

In reversing, the Appellate Division conceded that Fremont had made a prima facie case that property owner had been unjustly enriched by satisfaction of the mortgage and disbursement of loan proceeds to property owner. But the court noted that to prevail in an action for imposition of an equitable mortgage, a party must demonstrate that the parties intended that a specific piece of property be held or transferred to secure an obligation. Here, the court held that Fremont never demonstrated such an intention. As a result, Fremont was not entitled to summary judgment on that claim. The court did not decide whether Fremont was entitled to summary judgment on its claim for damages for unjust enrichment, because Supreme Court had not addressed Fremont's summary judgment motion on the unjust enrichment claim.

Foreclosure Sale Purchaser Entitled to Marketable Title

Rose Development Corp. v. Einhorn

NYLJ 9/21/09, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In purchaser's action for contribution and indemnification against a mortgagee who foreclosed on property to which the mortgagee did not have title, mortgagee appealed from Supreme Court's grant of summary judgment to purchaser. The Appellate Division modified to reduce the amount of the award, but otherwise affirmed, holding that a foreclosure sale purchaser is entitled to good and marketable title.

Mortgagee foreclosed on a mortgage it did not own. The Einhorn group purchased at the foreclosure sale, and then resold to Rose for $150,000. Rose obtained a title insurance policy for $275,000 (an amount less than the property's market value). When the defect in title was discovered, the title insurer paid $275,000 to Rose. Rose then brought this action, on the title insurer's behalf, for damages suffered as a result of the defective title conveyed by Einhorn. Einhorn then brought a third-party action against mortgagee, seeking contribution and indemnification. Supreme Court awarded summary judgment to Einhorn on the third-party complaint, and mortgagee appealed.

The Appellate Division started by holding that a purchaser at a foreclosure sale is entitled to good marketable title. Because mortgagee was responsible for the defect in title, mortgagee was liable to Einhorn for contribution and indemnification. The court then rejected mortgagee's contention that title insurer had improperly paid Rose more than Rose had paid for the property. The court noted that when there has been a total loss of title, a title insurance purchaser is entitled to market value within the limit of the property. Here, because market value was greater than the policy's $275,000 limit, Rose was entitled to $275,000 from title insurer. The court modified, however, to limit the amount of contribution Einhorn could recover from mortgagee to $125,000, because Einhorn had retained the $150,000 it had received from Rose.

COMMENT

If a purchaser at a foreclosure sale establishes that title is unmarketable, purchaser may vacate the sale and recover its security deposit. In NYCTL 1998-2 Trust and Bank of New York v. Amour Estates, 12 Misc. 3d 1190(A), the purchaser discovered after conducting a title search that it was precluded from using the property it purchased at a foreclosure sale because the property, a recreation room in the sub-basement of a condominium, could only be used by owners of residential units in the building. Because the terms of sale did not disclose this information, the court vacated the sale and returned purchaser's deposit on grounds of mutual mistake; neither the mortgagee nor the purchaser was aware of the condition on the property rendering title unmarketable.

When the mortgagee is aware of the defect, the right to vacate the sale is even clearer. For instance, in Champion Mortgage v. Knight, 16 Misc.3d 1118(A), the court held that a mortgagee's failure to disclose the existence of a senior mortgage, when the mortgagee knew that a forged satisfaction of that mortgage had been judicially revoked, entitled the purchaser to vacate the sale and recover its deposit. By contrast, if a mortgagee discloses the defect prior to the foreclosure sale, then the purchaser will have no grounds to vacate the sale. In Aaron v. Kent, 182 A.D.2d 960, the referee announced the sale was subject to unpaid taxes and the redemption period had not expired, rendering title unmarketable. Purchaser bid anyway. In response to the purchaser's efforts to vacate the sale for failure to convey marketable title, the court compelled the purchaser to complete the sale because the purchaser could not vacate based on a condition of which he had prior notice.

Purchaser's ordinary remedy when seller fails to convey marketable title ' whether or not the sale is a foreclosure sale ' is rescission of the contract; a purchaser can only recover damages for loss of bargain when the seller has acted in bad faith. Thus, in Sirles v. Harvey, 256 A.D.2d 1227, the Appellate Division held that sellers were not entitled to summary judgment on purchaser's claim for loss of bargain damages resulting from breach of an agreement to convey marketable title,
concluding that a triable question of fact existed as to whether the seller's failure to convey marketable title was the product of fraud or bad faith. The court cited an early Court of Appeals case, Walton v. Meeks, 120 NY 79, for the proposition that loss of bargain damages requires a showing of bad faith or fraud. By contrast, in Rose Development Corp, the court awarded loss of bargain damages without any proof of bad faith.

Restrictive Covenant Not Extinguished

Neri's Land Improvement, LLC v. J.J. Cassone Bakery, Inc.

NYLJ 10/5/09, p. 30, col. 6 and 31, col. 1,

AppDiv, Second Dept.

(memorandum opinions)

In two separate but related actions, one landowner sought a declaration that a restrictive covenant was unenforceable and should be extinguished, while the other sought specific performance of the covenant. Supreme Court had granted specific performance, and the Appellate Division affirmed, holding that the restrictive covenant remained of substantial benefit to the landowner seeking to enforce it.

Neri owns two parcels of land on which it operates a bakery business. In 1990, Cassone, owner of a competing bakery business, bought the subject parcel of land, which is located between Neri's two parcels. In 2003, Cassone transferred the subject parcel to 41 Pearl Street, subject to a restrictive covenant prohibiting use of the premises “as a bakery or for any purpose related to or ancillary to a bakery” for a 50-year period. Three years later, Neri purchased the property from 41 Pearl Street. In the deed, Neri acknowledged the existence of the covenant and agreed to be bound by it. Neri then brought this action seeking to extinguish the covenant pursuant to RPAPL Section 1951, and seeking damages for violation of the Donnelly Act (New York's antitrust law), General Business Law section 340. At the same time, Cassone sought specific performance of the covenant. In both cases, Supreme Court held the covenant enforceable, and Neri appealed both decisions.

In affirming, the Appellate Division noted that Neri had never alleged why the restrictive covenant is of no substantial benefit to Cassone, a requirement for extinguishment under RPAPL section 1951. The court observed that the covenant did serve to protect Cassone's bakery, located less than a mile away, from competition. Moreover, the court emphasized that Neri will still be able to put the burdened land to productive use, and that because Neri had notice of the restrictive covenant, it was not in a position to contend that hardship should tip the balance in favor of removal of the covenant. The court also dismissed Neri's Donnelly Act claim because Neri had never alleged that the alleged co-conspirators ' Cassone and 41 Pearl Street ' were in competition with one another or with Neri. Finally, the court held that Cassone had established Neri's violation of the covenant by using the premises for its corporate office, and that Neri had failed to raise a triable issue of fact about whether its use of the premises violated the covenant. As a result, Cassone was entitled to specific performance.

Failure to Cancel in Time Results in Forfeiture of Down Payment

M Squared New Rochelle, LLC v. G&G Properties, LLC

NYLJ 9/21/09, p. 29, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action by purchaser for a judgment declaring that it was not in breach of the sale contract and was therefore entitled to return of its down payment, seller appealed from Supreme Court's judgment declaring that purchaser was not in breach. The Appellate Division modified to dismiss the cause of action, to require the escrowee to release the down payment to seller, and to cancel the notice of pendency, holding that because purchaser did not cancel the contract within the 24-month “due diligence period,” the seller could retain the seller's down payment even if the conditions imposed on purchaser's obligation to close were never satisfied.

In 2004, seller agreed to convey the subject property to purchaser for $8 million. Purchaser paid a $500,000 down payment, which by the terms of the contract, was to become “non-refundable ' at the expiration of twenty four (24) months from the start of the Due Diligence Period” as defined in the contract. This forfeiture provision was expressly subject to any contrary provision that might appear in section 2.02 or elsewhere in the sale contract. Section 2.02 gave the purchaser the right to cancel if purchaser determined that the development was not economically feasible, and provided that any deposit would then be returned to the purchaser except that seller would “be entitled to retain any portion of the Deposit that has become non-refundable under the Schedule set forth in Section 2.03.” The contract also was made contingent on purchaser's ability to obtain approvals to build 120 residential units, but also provided that in the event the approvals were not granted within 30 months from the start of the Due Diligence period, seller would have the option to extend the closing date or to cancel the contract. Purchaser did not obtain the necessary approvals within 30 months, and did not cancel the contract. Then, in 2007, purchaser brought this action for a declaration that it was not in breach, so that it could obtain return of its down payment. Supreme Court granted purchaser's summary judgment motion, and seller appealed.

In modifying, the Appellate Division concluded that the contract's terms were designed to assure that the seller would not be contractually obligated to close title at any time after the expiration of 30 months after commencement of the due diligence period, and that if the seller were to terminate after 30 months, seller would be entitled to retain purchaser's entire down payment. Here, the 30 months had concededly expired, resulting in forfeiture of the down payment. In addition, the court held that purchaser could not rely on its inability to obtain approvals during the requisite period as an excuse for failing to close, because purchaser had obtained approvals in conjunction with a condominium project, but purchaser then changed its mind to change the units from condominiums to rental units. The court concluded that purchaser could not use the failure to obtain approvals as an excuse for its own performance when the failure was largely due to purchaser's own change in the nature of its project. As a result, seller was entitled to retain the down payment, and to cancellation of purchaser's notice of pendency.

Possibility That Mortgagee Was on Inquiry Notice Precludes Summary Judgment

Maiorano v. Garson

NYLJ 10/5/09, p. 38, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In two related actions, one a foreclosure action and the other an action to determine claims to real property, both the mortgagee and holders of an unrecorded interest in the property appealed from Supreme Court's denial of their summary judgment motions in the respective actions. The Appellate Division modified to grant mortgagee summary judgment on the unrecorded owners' claim for attorney's fees, but otherwise affirmed, holding that questions of fact remained about whether mortgagee was on inquiry notice of the unrecorded interest.

Unrecorded owners purchased the subject property in 1971. In 2002, they faced financial difficulties. To avoid foreclosure, they conveyed the property to Garson, who executed an agreement providing that, using his better credit, he would obtain a new mortgage on the property, that unrecorded owners would make monthly payments on the new mortgage, and that Garson (who the agreement referred to as “trustee”) would be entitled to sell the property without unrecorded owners' consent if they fell behind on payments. The deed to Garson was recorded, but the agreement was not. Garson then obtained a new mortgage. Unrecorded owners again fell into financial difficulty, and defaulted on the mortgage. Garson then sold the property to Angelillo, who took out a mortgage from mortgagee. Unrecorded owners then brought an action against Garson, Angelillo, and mortgagee to cancel the deed and mortgage, contending that Garson had breached his duties under the agreement by selling without notice to them. Angelillo then defaulted on the mortgage, leading mortgagee to bring a foreclosure action. The two actions were joined, and unrecorded owners and mortgagee both sought summary judgment. Supreme Court denied the summary judgment motions, and both parties appealed.

The Appellate Division started by modifying Supreme Court's order to grant mortgagee's motion for summary judgment dismissing unrecorded owners' claim for attorneys' fees, noting that although unrecorded owners had sought cancellation of the mortgage, they had advanced no claim against the mortgagee. The court then turned to the underlying substantive claim and noted that mortgagee had established a prima facie case that it was a bona fide encumbrancer for value because a title search revealed that Angelillo was the record owner of the property, and did not reveal the unrecorded interest. But the court then held that unrecorded owners had raised a question of fact about whether mortgagee was on inquiry notice of their interest. Unrecorded owners contend that they were in possession of the premises when, in connection with the Garson to Angelillo transaction, an appraiser visited the premises. They also point to an HUD-1 in mortgagee's possession with a typewritten entry listing them as sellers, crossed out by hand with Garson's name replacing theirs. On these facts, the court held that there were questions about whether mortgagee had knowledge of facts which put it on inquiry of a right in potential conflict with its own.

COMMENT

Actual possession of real estate places a subsequent purchaser on inquiry notice of an unrecorded interest in a property. Thus, in HSBC Mortgage Services, Inc. v. Alphonso, 58 A.D.3d 598, the court held that a subsequent purchaser's deed, though recorded first, was subordinate to HSBC's mortgage from a prior unrecorded purchaser. At the time the subsequent purchaser obtained the property, the person in possession held an unrecorded interest, but was not the record title holder. The apparent discrepancy in ownership imposed a duty to inquire on the subsequent purchaser, making his interest in the property subject to any prior interests that an investigation would reveal.

Mortgagees have the same duty to inquire when the property is occupied by a person other than the record title owner. For example, in Phelan v. Brady, 119 N.Y. 587, the court dismissed a mortgagee's foreclosure action on an apartment building in which a tenant purchased the building prior to the seller's execution and delivery of the mortgage. Although the subsequent mortgagee recorded his deed first and did not have actual knowledge of the prior, unrecorded purchase, the court held that the mortgagee's claim was subordinate to that of the previous purchaser. The court emphasized that the mortgagee had inquiry notice of the previous purchaser's rights to the property since the purchaser occupied several rooms in the property at the time the mortgage was executed.

Scrivener's Error in Payoff Letter Subject to Correction

Aurora Loan Services LLC v. Arauz

NYLJ 10/7/09, p. 27., col. 1

Supreme Ct., Kings Cty.

(Schmidt, J.)

In a mortgage foreclosure action, mortgagor sought a preliminary injunction directing mortgagee to accept funds to pay off the mortgage in accordance with mortgagee's payoff letter, and enjoining mortgagee from foreclosing on the property. Supreme Court denied the preliminary injunction, holding that a scrivener's error in the payoff letter was subject to correction, and as a result, it was far from clear that mortgagor would ultimately prevail on the merits.

The mortgage was given to secure a $500,000 loan mortgagor had obtained from Lehman. Mortgagor defaulted on the loan on June 1, 2008. The mortgage and note were subsequently assigned to current mortgagee. Mortgagor and mortgagee began negotiations to relieve mortgagor of the mortgage debt on completion of a short sale of the secured property. Mortgagor proposed a short sale at a price of $325,000, but mortgagee allegedly rejected that price as inadequate. Mortgagor then submitted a revised contract of sale at a price of $360,000. Mortgagee contends that it internally approved sale at $360,000 on March 20, 2009. The following day, however, mortgagee faxed a payoff letter to mortgagor's lawyer stating that it had approved the sale based on a purchase price of $196,850, and that the required minimum payoff amount was $171,964.28. On May 11, mortgagee sent a similar letter with the same prices. Mortgagor then consummated sale of the property at a price of $196,850, and mortgagee received two checks from the title company totaling $171,964.28, the amount specified in the payoff letter. On June 4, mortgagee notified the title company that it would not accept that sum, and returned the two checks. Mortgagee then filed a notice of pendency and brought this foreclosure action, contending that it had agreed to a sale at $360,000, and the two faxed payoff letters were the product of a mistake. Mortgagor then moved for a preliminary injunction requiring mortgagee to accept the checks, issue a satisfaction, and stop the foreclosure proceeding.

In denying mortgagor's motion, the court noted that when parties have entered into an agreement, and when one party alleges a mistake in the reduction of that agreement to writing, the mistake may be corrected. Correction is particularly appropriate when the beneficiary of the mistake knows about the mistake and tries to take advantage of the error. Here, there is a high likelihood that mortgagor knew of the mistake, making rescission appropriate. Moreover, mortgagor did not show that he would be irreparably harmed by denial of the preliminary injunction, because any potential injury could be remedied with an award of money damages. As a result, the court concluded that mortgagor was not entitled to a preliminary injunction.

No Equitable Mortgage Without Intent to Create Security Interest

Fremont Investment & Loan v. Delsol

NYLJ 9/16/09, p. 36, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action to impose an equitable lien on real property, owner of the property appealed from a Supreme Court order imposing the lien. The Appellate Division reversed, holding that failure to establish an intent to create a security interest precluded imposition of an equitable mortgage.

Property owner held the property subject to a mortgage to secure an indebtedness that amounted to $258,750.33 at the time owner attempted to sell the property. Fremont agreed to provide a mortgage to the purchaser, and provided funds for the satisfaction of the existing mortgage by making a wire transfer to an attorney, DeGrasse, who was entrusted with receiving loan proceeds and applying them to the proper parties. De Grasse paid off the existing mortgage, obtained a satisfaction of that mortgage, disbursed some monies to property owner, and absconded with the remainder of the loan proceeds. DeGrasse never recorded a deed to the purchaser or Fremont's mortgage. As a result, property owner retained title to the subject property, but with a mortgage that had been satisfied. Fremont then brought this action to impose an equitable mortgage on the property, and Supreme Court granted summary judgment to Fremont. Property owner appealed.

In reversing, the Appellate Division conceded that Fremont had made a prima facie case that property owner had been unjustly enriched by satisfaction of the mortgage and disbursement of loan proceeds to property owner. But the court noted that to prevail in an action for imposition of an equitable mortgage, a party must demonstrate that the parties intended that a specific piece of property be held or transferred to secure an obligation. Here, the court held that Fremont never demonstrated such an intention. As a result, Fremont was not entitled to summary judgment on that claim. The court did not decide whether Fremont was entitled to summary judgment on its claim for damages for unjust enrichment, because Supreme Court had not addressed Fremont's summary judgment motion on the unjust enrichment claim.

Foreclosure Sale Purchaser Entitled to Marketable Title

Rose Development Corp. v. Einhorn

NYLJ 9/21/09, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In purchaser's action for contribution and indemnification against a mortgagee who foreclosed on property to which the mortgagee did not have title, mortgagee appealed from Supreme Court's grant of summary judgment to purchaser. The Appellate Division modified to reduce the amount of the award, but otherwise affirmed, holding that a foreclosure sale purchaser is entitled to good and marketable title.

Mortgagee foreclosed on a mortgage it did not own. The Einhorn group purchased at the foreclosure sale, and then resold to Rose for $150,000. Rose obtained a title insurance policy for $275,000 (an amount less than the property's market value). When the defect in title was discovered, the title insurer paid $275,000 to Rose. Rose then brought this action, on the title insurer's behalf, for damages suffered as a result of the defective title conveyed by Einhorn. Einhorn then brought a third-party action against mortgagee, seeking contribution and indemnification. Supreme Court awarded summary judgment to Einhorn on the third-party complaint, and mortgagee appealed.

The Appellate Division started by holding that a purchaser at a foreclosure sale is entitled to good marketable title. Because mortgagee was responsible for the defect in title, mortgagee was liable to Einhorn for contribution and indemnification. The court then rejected mortgagee's contention that title insurer had improperly paid Rose more than Rose had paid for the property. The court noted that when there has been a total loss of title, a title insurance purchaser is entitled to market value within the limit of the property. Here, because market value was greater than the policy's $275,000 limit, Rose was entitled to $275,000 from title insurer. The court modified, however, to limit the amount of contribution Einhorn could recover from mortgagee to $125,000, because Einhorn had retained the $150,000 it had received from Rose.

COMMENT

If a purchaser at a foreclosure sale establishes that title is unmarketable, purchaser may vacate the sale and recover its security deposit. In NYCTL 1998-2 Trust and Bank of New York v. Amour Estates, 12 Misc. 3d 1190(A), the purchaser discovered after conducting a title search that it was precluded from using the property it purchased at a foreclosure sale because the property, a recreation room in the sub-basement of a condominium, could only be used by owners of residential units in the building. Because the terms of sale did not disclose this information, the court vacated the sale and returned purchaser's deposit on grounds of mutual mistake; neither the mortgagee nor the purchaser was aware of the condition on the property rendering title unmarketable.

When the mortgagee is aware of the defect, the right to vacate the sale is even clearer. For instance, in Champion Mortgage v. Knight, 16 Misc.3d 1118(A), the court held that a mortgagee's failure to disclose the existence of a senior mortgage, when the mortgagee knew that a forged satisfaction of that mortgage had been judicially revoked, entitled the purchaser to vacate the sale and recover its deposit. By contrast, if a mortgagee discloses the defect prior to the foreclosure sale, then the purchaser will have no grounds to vacate the sale. In Aaron v. Kent, 182 A.D.2d 960, the referee announced the sale was subject to unpaid taxes and the redemption period had not expired, rendering title unmarketable. Purchaser bid anyway. In response to the purchaser's efforts to vacate the sale for failure to convey marketable title, the court compelled the purchaser to complete the sale because the purchaser could not vacate based on a condition of which he had prior notice.

Purchaser's ordinary remedy when seller fails to convey marketable title ' whether or not the sale is a foreclosure sale ' is rescission of the contract; a purchaser can only recover damages for loss of bargain when the seller has acted in bad faith. Thus, in Sirles v. Harvey, 256 A.D.2d 1227, the Appellate Division held that sellers were not entitled to summary judgment on purchaser's claim for loss of bargain damages resulting from breach of an agreement to convey marketable title,
concluding that a triable question of fact existed as to whether the seller's failure to convey marketable title was the product of fraud or bad faith. The court cited an early Court of Appeals case, Walton v. Meeks, 120 NY 79, for the proposition that loss of bargain damages requires a showing of bad faith or fraud. By contrast, in Rose Development Corp, the court awarded loss of bargain damages without any proof of bad faith.

Restrictive Covenant Not Extinguished

Neri's Land Improvement, LLC v. J.J. Cassone Bakery, Inc.

NYLJ 10/5/09, p. 30, col. 6 and 31, col. 1,

AppDiv, Second Dept.

(memorandum opinions)

In two separate but related actions, one landowner sought a declaration that a restrictive covenant was unenforceable and should be extinguished, while the other sought specific performance of the covenant. Supreme Court had granted specific performance, and the Appellate Division affirmed, holding that the restrictive covenant remained of substantial benefit to the landowner seeking to enforce it.

Neri owns two parcels of land on which it operates a bakery business. In 1990, Cassone, owner of a competing bakery business, bought the subject parcel of land, which is located between Neri's two parcels. In 2003, Cassone transferred the subject parcel to 41 Pearl Street, subject to a restrictive covenant prohibiting use of the premises “as a bakery or for any purpose related to or ancillary to a bakery” for a 50-year period. Three years later, Neri purchased the property from 41 Pearl Street. In the deed, Neri acknowledged the existence of the covenant and agreed to be bound by it. Neri then brought this action seeking to extinguish the covenant pursuant to RPAPL Section 1951, and seeking damages for violation of the Donnelly Act (New York's antitrust law), General Business Law section 340. At the same time, Cassone sought specific performance of the covenant. In both cases, Supreme Court held the covenant enforceable, and Neri appealed both decisions.

In affirming, the Appellate Division noted that Neri had never alleged why the restrictive covenant is of no substantial benefit to Cassone, a requirement for extinguishment under RPAPL section 1951. The court observed that the covenant did serve to protect Cassone's bakery, located less than a mile away, from competition. Moreover, the court emphasized that Neri will still be able to put the burdened land to productive use, and that because Neri had notice of the restrictive covenant, it was not in a position to contend that hardship should tip the balance in favor of removal of the covenant. The court also dismissed Neri's Donnelly Act claim because Neri had never alleged that the alleged co-conspirators ' Cassone and 41 Pearl Street ' were in competition with one another or with Neri. Finally, the court held that Cassone had established Neri's violation of the covenant by using the premises for its corporate office, and that Neri had failed to raise a triable issue of fact about whether its use of the premises violated the covenant. As a result, Cassone was entitled to specific performance.

Failure to Cancel in Time Results in Forfeiture of Down Payment

M Squared New Rochelle, LLC v. G&G Properties, LLC

NYLJ 9/21/09, p. 29, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action by purchaser for a judgment declaring that it was not in breach of the sale contract and was therefore entitled to return of its down payment, seller appealed from Supreme Court's judgment declaring that purchaser was not in breach. The Appellate Division modified to dismiss the cause of action, to require the escrowee to release the down payment to seller, and to cancel the notice of pendency, holding that because purchaser did not cancel the contract within the 24-month “due diligence period,” the seller could retain the seller's down payment even if the conditions imposed on purchaser's obligation to close were never satisfied.

In 2004, seller agreed to convey the subject property to purchaser for $8 million. Purchaser paid a $500,000 down payment, which by the terms of the contract, was to become “non-refundable ' at the expiration of twenty four (24) months from the start of the Due Diligence Period” as defined in the contract. This forfeiture provision was expressly subject to any contrary provision that might appear in section 2.02 or elsewhere in the sale contract. Section 2.02 gave the purchaser the right to cancel if purchaser determined that the development was not economically feasible, and provided that any deposit would then be returned to the purchaser except that seller would “be entitled to retain any portion of the Deposit that has become non-refundable under the Schedule set forth in Section 2.03.” The contract also was made contingent on purchaser's ability to obtain approvals to build 120 residential units, but also provided that in the event the approvals were not granted within 30 months from the start of the Due Diligence period, seller would have the option to extend the closing date or to cancel the contract. Purchaser did not obtain the necessary approvals within 30 months, and did not cancel the contract. Then, in 2007, purchaser brought this action for a declaration that it was not in breach, so that it could obtain return of its down payment. Supreme Court granted purchaser's summary judgment motion, and seller appealed.

In modifying, the Appellate Division concluded that the contract's terms were designed to assure that the seller would not be contractually obligated to close title at any time after the expiration of 30 months after commencement of the due diligence period, and that if the seller were to terminate after 30 months, seller would be entitled to retain purchaser's entire down payment. Here, the 30 months had concededly expired, resulting in forfeiture of the down payment. In addition, the court held that purchaser could not rely on its inability to obtain approvals during the requisite period as an excuse for failing to close, because purchaser had obtained approvals in conjunction with a condominium project, but purchaser then changed its mind to change the units from condominiums to rental units. The court concluded that purchaser could not use the failure to obtain approvals as an excuse for its own performance when the failure was largely due to purchaser's own change in the nature of its project. As a result, seller was entitled to retain the down payment, and to cancellation of purchaser's notice of pendency.

Possibility That Mortgagee Was on Inquiry Notice Precludes Summary Judgment

Maiorano v. Garson

NYLJ 10/5/09, p. 38, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In two related actions, one a foreclosure action and the other an action to determine claims to real property, both the mortgagee and holders of an unrecorded interest in the property appealed from Supreme Court's denial of their summary judgment motions in the respective actions. The Appellate Division modified to grant mortgagee summary judgment on the unrecorded owners' claim for attorney's fees, but otherwise affirmed, holding that questions of fact remained about whether mortgagee was on inquiry notice of the unrecorded interest.

Unrecorded owners purchased the subject property in 1971. In 2002, they faced financial difficulties. To avoid foreclosure, they conveyed the property to Garson, who executed an agreement providing that, using his better credit, he would obtain a new mortgage on the property, that unrecorded owners would make monthly payments on the new mortgage, and that Garson (who the agreement referred to as “trustee”) would be entitled to sell the property without unrecorded owners' consent if they fell behind on payments. The deed to Garson was recorded, but the agreement was not. Garson then obtained a new mortgage. Unrecorded owners again fell into financial difficulty, and defaulted on the mortgage. Garson then sold the property to Angelillo, who took out a mortgage from mortgagee. Unrecorded owners then brought an action against Garson, Angelillo, and mortgagee to cancel the deed and mortgage, contending that Garson had breached his duties under the agreement by selling without notice to them. Angelillo then defaulted on the mortgage, leading mortgagee to bring a foreclosure action. The two actions were joined, and unrecorded owners and mortgagee both sought summary judgment. Supreme Court denied the summary judgment motions, and both parties appealed.

The Appellate Division started by modifying Supreme Court's order to grant mortgagee's motion for summary judgment dismissing unrecorded owners' claim for attorneys' fees, noting that although unrecorded owners had sought cancellation of the mortgage, they had advanced no claim against the mortgagee. The court then turned to the underlying substantive claim and noted that mortgagee had established a prima facie case that it was a bona fide encumbrancer for value because a title search revealed that Angelillo was the record owner of the property, and did not reveal the unrecorded interest. But the court then held that unrecorded owners had raised a question of fact about whether mortgagee was on inquiry notice of their interest. Unrecorded owners contend that they were in possession of the premises when, in connection with the Garson to Angelillo transaction, an appraiser visited the premises. They also point to an HUD-1 in mortgagee's possession with a typewritten entry listing them as sellers, crossed out by hand with Garson's name replacing theirs. On these facts, the court held that there were questions about whether mortgagee had knowledge of facts which put it on inquiry of a right in potential conflict with its own.

COMMENT

Actual possession of real estate places a subsequent purchaser on inquiry notice of an unrecorded interest in a property. Thus, in HSBC Mortgage Services, Inc. v. Alphonso, 5 8 A.D.3d 598, the court held that a subsequent purchaser's deed, though recorded first, was subordinate to HSBC's mortgage from a prior unrecorded purchaser. At the time the subsequent purchaser obtained the property, the person in possession held an unrecorded interest, but was not the record title holder. The apparent discrepancy in ownership imposed a duty to inquire on the subsequent purchaser, making his interest in the property subject to any prior interests that an investigation would reveal.

Mortgagees have the same duty to inquire when the property is occupied by a person other than the record title owner. For example, in Phelan v. Brady, 119 N.Y. 587, the court dismissed a mortgagee's foreclosure action on an apartment building in which a tenant purchased the building prior to the seller's execution and delivery of the mortgage. Although the subsequent mortgagee recorded his deed first and did not have actual knowledge of the prior, unrecorded purchase, the court held that the mortgagee's claim was subordinate to that of the previous purchaser. The court emphasized that the mortgagee had inquiry notice of the previous purchaser's rights to the property since the purchaser occupied several rooms in the property at the time the mortgage was executed.