Real Property Law

Deed Executed By Person with No Authority to Act on Behalf of Corporate Owner Confers No Right on Purchasers

Lido Realty LLC v. 67-69 LLC

NYLJ 6/30/10, p. 26, col. 1

Supreme Ct., Bronx Cty

(Salman, J.)

In an action by Lido, 75% owner of the subject premises, for a declaration that various deeds and mortgage satisfactions were void, and conferred no rights on purchasers, Lido moved for summary judgment. The court granted Lido's motion, holding that a forged deed conferred no rights on a purchaser of that deed, and that a deed executed on behalf of a corporation by a person without authority to act for the corporation also conferred no rights on purchasers.

In 2006, Stempler conveyed the subject premises to Lido and MBM1 as tenants in common, with Lido taking a 75% interest and MBM1 a 25% interest. Under the terms of a “tenants in common agreement,” neither co-tenant was entitled to sell its interest in the premises without the consent of the other. Lido and MBM1 financed their purchase of the premises with a purchase money first mortgage loan from Stempler in the amount of $5 million. A month later, Stempler gave Lido and MBM1 a second mortgage in the amount of $700,000. The following year, MBM1 alone gave Goldstein a third mortgage on its interest in the amount of $2 million. All of the deeds and mortgages were properly recorded.

In 2009, Mark Benum, who held no title to the property, purported to convey the premises to defendant 67-69 free and clear of mortgages and encumbrances. Benum produced a deed from Lido to MBM1 bearing the signature of Goldstein as “sole member” of Lido to Benum himself as “sole member of MBM1,” and then delivered to 67-69 a deed from MBM1, signed by Benum as sole member of MBM1. Benum also delivered satisfactions of the first two mortgages, signed by Stempler, and a satisfaction of the third mortgage, signed by Goldstein.

The signatures of Goldstein and Stempler on these various deeds and mortgages were notarized, but the notaries involved now concede that they never witnessed the signatures they notarized, and it is conceded that the signatures were forged. Benum's signature, purportedly on behalf of MBM1, was genuine, but Benum was not in fact the sole principal of MBM1, and had no authority to act on behalf of MBM1. On these facts, Lido, MBM1, Goldstein, and Stempler sought summary judgment invalidating the disputed deeds and satisfactions.

In holding the deed from Lido to MBM1 invalid, even with respect to 67-69, the court relied on established law holding that a person who acquires a forged deed cannot claim the status of a bona fide purchaser. The court then noted that because of the provisions of the tenants in common agreement, MBM1 was not entitled to sell to 67-69 without the consent of Lido, thus invalidating the deed to 67-69 even with respect to MBM1's 25% interest. But the court went on to hold that even absent the agreement, 67-69 could not claim bona fide purchaser status with respect to the deed from MBM1 because there were no statement conveyed by MBM1 to 67-69 cloaking Benum with apparent authority to sign a deed on MBM1's behalf. Indeed, the court noted that MBM1's filed documents did not indicate that Benum had an interest in MBM1, and that a lawsuit brought by MBM1 against Benum in 2008 provided a public record that Benum was not entitled to sign on behalf of MBM1. As a result, the court held that 67-69 actually and constructively possessed facts that would lead a prudent purchaser to investigate Benum's purported corporate authority. Reliance on document produced by Benum himself was inadequate to make 67-69 a bona fide purchaser. With respect to the mortgage satisfactions, as well, the court held that the satisfactions were void as forgeries. The court did indicate that 67-69 was not without recourse, as it might have actions against Benum and against any title insurer for the losses it took in paying $6 million for property not owned by Benum.

COMMENT

Generally, a bona fide purchaser for value is protected in her title unless, at the time of her purchase, she had notice of a prior fraud by the seller or other party in her chain of title. In cases where a purchaser's chain of title includes a deed signed by an agent of a corporation who fraudulently represents that he has authority to act on the corporation's behalf, the purchaser has notice of the agent's fraud unless she can establish that the agent had apparent authority to act on the corporation's behalf, or that the corporation ratified the agent's actions. Inherent authority is only created by the words and actions of a principal, not those of an agent. Therefore, a bona fide purchaser is only protected if the principal acted in a way to cause the purchaser to mistakenly believe that the agent was acting within the limits of her actual authority. The Court of Appeals explained this principle in Hallock v. State, 64 N.Y.2d 224, where it held that landowners' attorneys had apparent authority to enter into a binding settlement agreement on behalf of their clients in an eminent domain proceeding, even if they lacked the actual authority to do so. The court noted that a third party with whom an agent deals is entitled to rely on the appearance of authority so long as it is reasonably based on the actions and words of the principal. The court further held that a failure by the principal to object to the unauthorized exercise of authority by an agent constitutes a ratification of the agent's actions, estopping the principal from claiming that the agent acted outside the bounds of her authority.

In LaSalle Bank National Association v. Ally, 39 A.D.3d 597, the Appellate Division held that a purchaser's mortgagee also has an obligation to investigate the authority of an agent with whom the purchaser dealt in order to become a bona fide encumbrancer. On Jan. 28, 2000, the subject property was conveyed from the original owner to New Era. On Jan. 27 (the day before New Era took title), Goggins, allegedly as president of New Era, conveyed the property to Williams. The latter financed her purchase with a mortgage loan from Nationscredit. On Feb. 10, New Era's actual president and sole shareholder, Zirbes, purported to convey the property to Ally, who financed his purchase with a mortgage from another lender. In the subsequent foreclosure action by the other lender, the court held that Nationscredit did not have a valid lien on the property. The court first noted that the deed executed by Goggins, purportedly as president of New Era, was not a forgery and thus was not void as a matter of law. However, Goggins lacked actual authority to execute the transaction, and Nationscredit failed to prove that Goggins was shrouded in apparent authority to act on New Era's behalf, nor did it offer evidence that it was not on notice of facts that would lead a prudent person to make inquiries into the facts of the transaction. Therefore, Nationscredit was not a bona fide encumbrancer of the property (although it did prevail on an equitable subrogation claim with respect to a mortgage satisfied with proceeds paid by Nationwide).

In 56th East 87th Units Corp. v. Kingsland Group, Inc., 30 A.D.3d 1134, the Appellate Division applied the same principles but in a different context, this time voiding certain unauthorized loan transactions entered into by the president of a corporation in the company's name. The president agreed to borrow money on behalf of his company, but then diverted the funds to his wife. The corporation subsequently brought suit against the lenders, asserting that the transactions were void because the president lacked the authority to enter into them. The court agreed, holding that the lenders were on notice of the company's bylaws, which prohibited the president from entering into such agreements without board approval. The court also rejected the lenders' claim that the company subsequently ratified the transaction, as the company promptly objected to the loans immediately after becoming aware of them.

Purchaser Waived Objections To Marketable Title

Venetoklis Family Limited Partnership v. Kora Developers, LLC

NYLJ 6/21/10, p. 36, col. 5

AppDiv., Second Dept.

(memorandum opinion)

In an action by seller to retain a deposit as liquidated damages, seller appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division reversed and granted the motion, holding that purchaser had waived any objection to marketability of title.

Purchaser contracted to buy the subject property for $21 million, and paid a deposit of $2.1 million. Before signing the contract, seller provided purchaser with a title report showing a permanent easement over the property for sewer pipes. Purchaser's own title report revealed the same easement. The sale contract required seller to convey insurable and marketable title, and required purchaser to notify seller within 10 days of receipt of any title report revealing objections to title. Failure to provide notice would be deemed waiver of any defect revealed by the report. Notice by purchaser of a defect triggered a 30-day cure period for seller. Purchaser provided seller with notice of certain defects, but provided no notice with respect to the easement. Ten months later, when purchaser's architect discovered the easement and notified the purchaser that the existence of the easement would add prohibitively to construction costs, purchaser informed seller that it deemed the easement to be an incurable title defect that made title unmarketable. Even though seller succeeded in removing the easement as an exception to purchaser's title insurance, purchaser refused to close. Seller then brought this action to retain the deposit, but Supreme Court denied seller's summary judgment motion.

In reversing, the Appellate Division emphasized that purchaser's awareness of the easement was undisputed, and that purchaser nevertheless failed to give written notice of any objections. By the terms of the contract, failure to give notice constituted waiver. As a result, seller made out a prima facie case for judgment as a matter of law, and purchaser failed to raise a triable issue of fact about whether it had breached. As a result, seller was entitled to summary judgment.

Husband Entitled to Partition And Sale of Condominium Unit Given to Couple By Wife's Parents

Manganiello v. Lipman

NYLJ 6/29/2010, p. 35, col. 1

AppDiv., First Dept.

(memorandum opinion)

In husband's action for partition of a condominium unit, husband appealed from Supreme Court's award of summary judgment to defendant wife. The Appellate Division modified to reinstate the complaint and award summary judgment to husband on his partition claim, with a remand for an accounting and other proceedings.

Wife's parents gave the couple the subject condominium apartment during the marriage. During the divorce proceeding, the parties did not apprise the court that they owned marital property, so the judgment did not address disposition of the condominium. Husband sought partition and sale of the condominium, and also sought use and occupancy for the period during which wife has been in exclusive occupation. Wife responded by asserting that she has solely contributed to the property's maintenance, and that she has continuously occupied the premises. From Supreme Court's grant of summary judgment to the wife, the husband appealed.

The Appellate Division emphasized that a joint owner of property has a right to partition unless the equities preclude partition or partition would result in prejudice. Here, by establishing his ownership and that physical partition could not be made without great prejudice, husband established a prima facie right to partition and sale. The wife's assertions that she has solely contributed to maintenance did not rebut the prima facie case, but instead rebutted only the presumption that the husband was entitled to an equal share of sale proceeds. The court remanded for a determination about how the proceeds should be distributed. Finally, the court held that the husband had not established ouster from the premises to support his claim for use and occupancy.

COMMENT

Although a cotenant is generally entitled to the partition of jointly owned property as a matter of right, courts sometimes invoke equitable principles to deny partition of a marital residence following a divorce judgment. For example, in Ripp v. Ripp, 38 A.D.2d 65, aff'd, 32 N.Y.2d 755, the Appellate Division denied ex-husband's request for partition because the couple's divorce judgment granted ex-wife sole and exclusive possession of the premises. The court reasoned that the matrimonial court was better positioned to balance the equities between the parties, and thus a separate action for partition of the property, without first requesting a modification of the divorce agreement, was inappropriate. The court noted that a divorce judgment granting sole possession to one party will not always preclude a subsequent action for partition, but in the instant case it did so because the divorce judgment was rendered only four months prior to the action for partition. Even when there has been no recent adjudication in a matrimonial action, courts may hold that the equities between the spouses bar a partition action. Thus, in Stressler v. Stressler, 193 A.D.2d 728, the court denied partition because the couple's unemancipated child still resided in the dwelling.

In cases involving the jointly owned property of divorced or divorcing couples, courts are generally hesitant to conclude that one spouse “ousted” the other, and as a result, courts often deny use and occupancy claims by the non-resident spouse. In Riley v. Jeker, 252 A.D.2d 680, for example, the Appellate Division overturned a Supreme Court order directing ex-husband to pay rent to ex-wife to compensate for his exclusive occupancy of the marital residence prior to a partition sale. In holding that there had been no ouster, the Appellate Division emphasized that the ex-wife had left voluntarily, and was partially responsible for delaying the sale of the property. Similarly, in Grant v. Grant, 234 A.D.2d 509, the Appellate Division denied ex-husband's request for the rental value of ex-wife's exclusive use and occupancy of the marital residence pending a partition sale. Ex-wife had remarried, triggering a provision in the couple's divorce agreement requiring that the marital residence be sold if either spouse re-wed. The sale was delayed in part because both parties agreed to list the residence for far more than it was worth. When the ex-husband to sue for rent, the court denied his request, noting that he was partially responsible for the delay.

In contrast to Riley and Grant, when courts distribute the proceeds of a partition sale, they are more likely to allow an ex-spouse out of possession to claim the value of possession as an offset against any credit for expenses claimed by the spouse in possession, particularly when the spouse in possession has remarried. For example, in Worthing v. Cossar, 93 A.D.2d 515, the Appellate Division allowed ex-wife, who was living on the partitioned premises with her second husband, to take a credit for taxes and mortgage payments, but held that because ex-husband had effectively been ousted, the value of the wife's possession should be offset against the credit for payments made by the wife. In Worthing, the court exercised its discretion to hold that an offset was appropriate.

In Partition Proceeding, Co-Owner Entitled to Credit for Down Payment

Czernicki v. Lawniczak

NYLJ 6/28/10, p. 27, col. 1

AppDiv., Second Dept.

(memorandum opinion)

In an action for partition and an accounting, plaintiff co-owner appealed from Supreme Court's judgment directing that the proceeds of the partition sale be divided equally among the co-owners. The Appellate Division modified, holding that plaintiff co-owner was entitled to a credit for the down payment he paid at the time of purchase.

Plaintiff and defendant purchased the subject 13-unit apartment building in 1989. Plaintiff paid a down payment and closing costs totaling more than $50,000. Plaintiff alleged that defendant had orally agreed to reimburse him for one-half of that amount, and to undertake management of the building. Plaintiff relied on a written agreement the parties had made with respect to another building a year earlier. The earlier agreement expressly required defendant to repay the down payment and closing costs. The parties filed partnership income tax returns for the years 1989-94 identifying the building as a partnership asset, with each party owning 50% of the partnership's capital. Defendant contended that his contribution to the venture was to be management of the building, and that he was not obligated to repay the deposit. Supreme Court concluded that plaintiff had failed to prove the existence of a partnership and failed to prove that defendant had assumed the obligation to repay half of the down payment. Supreme Court relied in part on the absence of a written agreement like the one the parties had signed with respect to the other building. Plaintiff appealed.

In modifying, the Appellate Division concluded that the tax return, combined with evidence that the parties had joint liability on two mortgages, was sufficient to establish the existence of a partnership. The court then relied on the parties course of conduct in connection with the earlier purchase to establish that defendant had agreed to repay half of the down payment. As a result, the court held that plaintiff was entitled to a credit for the down payment and closing costs, plus interest.

State Regulation of Real Estate Appraisal Not
Pre-Empted By Federal Law

People v. First American Corp.

NYLJ 6/14/10, p. 15,, col. 1

AppDiv., First Dept.

(Opinion by Gonzalez, J.)

In an action by the New York State Attorney General (AG) asserting claims against an appraisal management company under section 63(12) of the Executive Law and section 349 of the General Business Law and for unjust enrichment, the appraisal management company appealed from Supreme Court's denial of its moved to dismiss on pre-emption grounds. The Appellate Division affirmed, holding that neither the Home Owner's Lending Act of 1933 (HOLA) nor the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) pre-empted state regulation in the field of real estate appraisal.

In this action, the AG alleges that Washington Mutual (WaMu) hired defendant appraisal management company and another such company to oversee its appraisal process and provide a structural buffer against conflicts of interest between WaMu and individual appraisers. The AG contends that defendant appraisal management company misled their customers and the public by stating that its appraisals represented independent assessments of market value and that the appraisals were conducted in accordance with professional standards when in fact they had implemented a system that allowed WaMu's loan origination staff to select appraisers who would inflate market value to WaMu's desired target loan amount. The appraisal management company moved to dismiss, contending that the federal statutes place responsibility for oversight of appraisal management companies on the federal Office of Thrift Supervision (OTS). Supreme Court denied the motion, and the appraisal management company appealed.

In affirming, the Appellate Division first disposed of the argument that the two federal statutes themselves pre-empted state regulation of appraisal practices, citing legislative history accompanying FIRREA that emphasized the importance of a combination of federal and state action to assure enforcement of good standards. The court then turned to whether OTS regulations pre-empted state law. The court noted that 12 CFR 560.2(b) includes a list of state laws expressly pre-empted, including regulation of loan fees. The court noted that the AG's claim did not seek to regulate bank fees. The more difficult question involved the effect of 12 CFR 560.2(c), which creates a presumption of pre-emption, with a narrow exception for state laws that only incidentally affect lending operations. The court held that enjoining an appraisal company from abdicating its responsibility to provide unbiased valuations falls within the exception.. Finally, the court rejected the argument that providing real estate appraisal services ia an authorized banking activity under HOLA, and therefore within the exclusive province of OTS regulation (12 USC section 1464(d)(7)(D).

Deed Given Fraudulently Provides Color of Title
Necessary to Support
Adverse Possession Claim

Ziegler v. Serrano

NYLJ 6/24/10, p. 30, col. 3

AppDiv., 3rd Dept.

(Opinion by Peters, J.)

In an action to quiet title based on adverse possession, true owner appealed from Supreme Court's award of summary judgment to adverse possessors. The Appellate Division affirmed, holding that even if the deed to adverse possessors had been fraudulent, possessors had no knowledge of the fraud.

True owner and her then-husband purchased the disputed parcel in 1972. Ten years later, true owner left without informing her husband where she was going. He obtained a divorce, granted upon true owner's default. He then brought an action to partition the marital property, and he was awarded title in 1985, again by virtue of a default judgment. A month later, he conveyed the disputed parcel to adverse possessors. In 1992, however, after true owner sought to vacate the divorce judgment and the partition judgment, the Appellate Division held that service was improper and vacated both judgments. True owner then brought an action challenging adverse possessors' title to the land, but the action was dismissed for failure to prosecute. In 2008, adverse possessors brought the instant action to quiet title to the land. Supreme Court awarded summary judgment to adverse possessors, concluding that the 1992 judgment was entitled to res judicata effect. True owner appealed.

In affirming, the Appellate Division first concluded that the 1992 dismissal was not on the merits, and therefore not entitled to res judicata effect. But the court concluded that adverse possessors had established all of the requisites to support their adverse possession claim. In addition to occupying the property continuously and exclusively since 1985, they had taken numerous actions consistent with ownership, including major improvements. Finally, they occupied under a claim of right, conferred by their deed and the dismissal of the 1992 action. The court rejected true owner's argument that because her husband's conveyance was fraudulent, the adverse possessors could not succeed on their adverse possession claim. The court noted that a deed by one purporting to have authority to convey provides the color of title necessary to support an adverse possession claim, and emphasized that in this case, true owner had come forward with no evidence to suggest that adverse possessors had any knowledge of fraud.

Deed Executed By Person with No Authority to Act on Behalf of Corporate Owner Confers No Right on Purchasers

Lido Realty LLC v. 67-69 LLC

NYLJ 6/30/10, p. 26, col. 1

Supreme Ct., Bronx Cty

(Salman, J.)

In an action by Lido, 75% owner of the subject premises, for a declaration that various deeds and mortgage satisfactions were void, and conferred no rights on purchasers, Lido moved for summary judgment. The court granted Lido's motion, holding that a forged deed conferred no rights on a purchaser of that deed, and that a deed executed on behalf of a corporation by a person without authority to act for the corporation also conferred no rights on purchasers.

In 2006, Stempler conveyed the subject premises to Lido and MBM1 as tenants in common, with Lido taking a 75% interest and MBM1 a 25% interest. Under the terms of a “tenants in common agreement,” neither co-tenant was entitled to sell its interest in the premises without the consent of the other. Lido and MBM1 financed their purchase of the premises with a purchase money first mortgage loan from Stempler in the amount of $5 million. A month later, Stempler gave Lido and MBM1 a second mortgage in the amount of $700,000. The following year, MBM1 alone gave Goldstein a third mortgage on its interest in the amount of $2 million. All of the deeds and mortgages were properly recorded.

In 2009, Mark Benum, who held no title to the property, purported to convey the premises to defendant 67-69 free and clear of mortgages and encumbrances. Benum produced a deed from Lido to MBM1 bearing the signature of Goldstein as “sole member” of Lido to Benum himself as “sole member of MBM1,” and then delivered to 67-69 a deed from MBM1, signed by Benum as sole member of MBM1. Benum also delivered satisfactions of the first two mortgages, signed by Stempler, and a satisfaction of the third mortgage, signed by Goldstein.

The signatures of Goldstein and Stempler on these various deeds and mortgages were notarized, but the notaries involved now concede that they never witnessed the signatures they notarized, and it is conceded that the signatures were forged. Benum's signature, purportedly on behalf of MBM1, was genuine, but Benum was not in fact the sole principal of MBM1, and had no authority to act on behalf of MBM1. On these facts, Lido, MBM1, Goldstein, and Stempler sought summary judgment invalidating the disputed deeds and satisfactions.

In holding the deed from Lido to MBM1 invalid, even with respect to 67-69, the court relied on established law holding that a person who acquires a forged deed cannot claim the status of a bona fide purchaser. The court then noted that because of the provisions of the tenants in common agreement, MBM1 was not entitled to sell to 67-69 without the consent of Lido, thus invalidating the deed to 67-69 even with respect to MBM1's 25% interest. But the court went on to hold that even absent the agreement, 67-69 could not claim bona fide purchaser status with respect to the deed from MBM1 because there were no statement conveyed by MBM1 to 67-69 cloaking Benum with apparent authority to sign a deed on MBM1's behalf. Indeed, the court noted that MBM1's filed documents did not indicate that Benum had an interest in MBM1, and that a lawsuit brought by MBM1 against Benum in 2008 provided a public record that Benum was not entitled to sign on behalf of MBM1. As a result, the court held that 67-69 actually and constructively possessed facts that would lead a prudent purchaser to investigate Benum's purported corporate authority. Reliance on document produced by Benum himself was inadequate to make 67-69 a bona fide purchaser. With respect to the mortgage satisfactions, as well, the court held that the satisfactions were void as forgeries. The court did indicate that 67-69 was not without recourse, as it might have actions against Benum and against any title insurer for the losses it took in paying $6 million for property not owned by Benum.

COMMENT

Generally, a bona fide purchaser for value is protected in her title unless, at the time of her purchase, she had notice of a prior fraud by the seller or other party in her chain of title. In cases where a purchaser's chain of title includes a deed signed by an agent of a corporation who fraudulently represents that he has authority to act on the corporation's behalf, the purchaser has notice of the agent's fraud unless she can establish that the agent had apparent authority to act on the corporation's behalf, or that the corporation ratified the agent's actions. Inherent authority is only created by the words and actions of a principal, not those of an agent. Therefore, a bona fide purchaser is only protected if the principal acted in a way to cause the purchaser to mistakenly believe that the agent was acting within the limits of her actual authority. The Court of Appeals explained this principle in Hallock v. State, 64 N.Y.2d 224, where it held that landowners' attorneys had apparent authority to enter into a binding settlement agreement on behalf of their clients in an eminent domain proceeding, even if they lacked the actual authority to do so. The court noted that a third party with whom an agent deals is entitled to rely on the appearance of authority so long as it is reasonably based on the actions and words of the principal. The court further held that a failure by the principal to object to the unauthorized exercise of authority by an agent constitutes a ratification of the agent's actions, estopping the principal from claiming that the agent acted outside the bounds of her authority.

In LaSalle Bank National Association v. Ally, 39 A.D.3d 597, the Appellate Division held that a purchaser's mortgagee also has an obligation to investigate the authority of an agent with whom the purchaser dealt in order to become a bona fide encumbrancer. On Jan. 28, 2000, the subject property was conveyed from the original owner to New Era. On Jan. 27 (the day before New Era took title), Goggins, allegedly as president of New Era, conveyed the property to Williams. The latter financed her purchase with a mortgage loan from Nationscredit. On Feb. 10, New Era's actual president and sole shareholder, Zirbes, purported to convey the property to Ally, who financed his purchase with a mortgage from another lender. In the subsequent foreclosure action by the other lender, the court held that Nationscredit did not have a valid lien on the property. The court first noted that the deed executed by Goggins, purportedly as president of New Era, was not a forgery and thus was not void as a matter of law. However, Goggins lacked actual authority to execute the transaction, and Nationscredit failed to prove that Goggins was shrouded in apparent authority to act on New Era's behalf, nor did it offer evidence that it was not on notice of facts that would lead a prudent person to make inquiries into the facts of the transaction. Therefore, Nationscredit was not a bona fide encumbrancer of the property (although it did prevail on an equitable subrogation claim with respect to a mortgage satisfied with proceeds paid by Nationwide).

In 56th East 87th Units Corp. v. Kingsland Group, Inc., 30 A.D.3d 1134, the Appellate Division applied the same principles but in a different context, this time voiding certain unauthorized loan transactions entered into by the president of a corporation in the company's name. The president agreed to borrow money on behalf of his company, but then diverted the funds to his wife. The corporation subsequently brought suit against the lenders, asserting that the transactions were void because the president lacked the authority to enter into them. The court agreed, holding that the lenders were on notice of the company's bylaws, which prohibited the president from entering into such agreements without board approval. The court also rejected the lenders' claim that the company subsequently ratified the transaction, as the company promptly objected to the loans immediately after becoming aware of them.

Purchaser Waived Objections To Marketable Title

Venetoklis Family Limited Partnership v. Kora Developers, LLC

NYLJ 6/21/10, p. 36, col. 5

AppDiv., Second Dept.

(memorandum opinion)

In an action by seller to retain a deposit as liquidated damages, seller appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division reversed and granted the motion, holding that purchaser had waived any objection to marketability of title.

Purchaser contracted to buy the subject property for $21 million, and paid a deposit of $2.1 million. Before signing the contract, seller provided purchaser with a title report showing a permanent easement over the property for sewer pipes. Purchaser's own title report revealed the same easement. The sale contract required seller to convey insurable and marketable title, and required purchaser to notify seller within 10 days of receipt of any title report revealing objections to title. Failure to provide notice would be deemed waiver of any defect revealed by the report. Notice by purchaser of a defect triggered a 30-day cure period for seller. Purchaser provided seller with notice of certain defects, but provided no notice with respect to the easement. Ten months later, when purchaser's architect discovered the easement and notified the purchaser that the existence of the easement would add prohibitively to construction costs, purchaser informed seller that it deemed the easement to be an incurable title defect that made title unmarketable. Even though seller succeeded in removing the easement as an exception to purchaser's title insurance, purchaser refused to close. Seller then brought this action to retain the deposit, but Supreme Court denied seller's summary judgment motion.

In reversing, the Appellate Division emphasized that purchaser's awareness of the easement was undisputed, and that purchaser nevertheless failed to give written notice of any objections. By the terms of the contract, failure to give notice constituted waiver. As a result, seller made out a prima facie case for judgment as a matter of law, and purchaser failed to raise a triable issue of fact about whether it had breached. As a result, seller was entitled to summary judgment.

Husband Entitled to Partition And Sale of Condominium Unit Given to Couple By Wife's Parents

Manganiello v. Lipman

NYLJ 6/29/2010, p. 35, col. 1

AppDiv., First Dept.

(memorandum opinion)

In husband's action for partition of a condominium unit, husband appealed from Supreme Court's award of summary judgment to defendant wife. The Appellate Division modified to reinstate the complaint and award summary judgment to husband on his partition claim, with a remand for an accounting and other proceedings.

Wife's parents gave the couple the subject condominium apartment during the marriage. During the divorce proceeding, the parties did not apprise the court that they owned marital property, so the judgment did not address disposition of the condominium. Husband sought partition and sale of the condominium, and also sought use and occupancy for the period during which wife has been in exclusive occupation. Wife responded by asserting that she has solely contributed to the property's maintenance, and that she has continuously occupied the premises. From Supreme Court's grant of summary judgment to the wife, the husband appealed.

The Appellate Division emphasized that a joint owner of property has a right to partition unless the equities preclude partition or partition would result in prejudice. Here, by establishing his ownership and that physical partition could not be made without great prejudice, husband established a prima facie right to partition and sale. The wife's assertions that she has solely contributed to maintenance did not rebut the prima facie case, but instead rebutted only the presumption that the husband was entitled to an equal share of sale proceeds. The court remanded for a determination about how the proceeds should be distributed. Finally, the court held that the husband had not established ouster from the premises to support his claim for use and occupancy.

COMMENT

Although a cotenant is generally entitled to the partition of jointly owned property as a matter of right, courts sometimes invoke equitable principles to deny partition of a marital residence following a divorce judgment. For example, in Ripp v. Ripp, 3 8 A.D.2d 65, aff'd, 32 N.Y.2d 755, the Appellate Division denied ex-husband's request for partition because the couple's divorce judgment granted ex-wife sole and exclusive possession of the premises. The court reasoned that the matrimonial court was better positioned to balance the equities between the parties, and thus a separate action for partition of the property, without first requesting a modification of the divorce agreement, was inappropriate. The court noted that a divorce judgment granting sole possession to one party will not always preclude a subsequent action for partition, but in the instant case it did so because the divorce judgment was rendered only four months prior to the action for partition. Even when there has been no recent adjudication in a matrimonial action, courts may hold that the equities between the spouses bar a partition action. Thus, in Stressler v. Stressler, 193 A.D.2d 728, the court denied partition because the couple's unemancipated child still resided in the dwelling.

In cases involving the jointly owned property of divorced or divorcing couples, courts are generally hesitant to conclude that one spouse “ousted” the other, and as a result, courts often deny use and occupancy claims by the non-resident spouse. In Riley v. Jeker, 252 A.D.2d 680, for example, the Appellate Division overturned a Supreme Court order directing ex-husband to pay rent to ex-wife to compensate for his exclusive occupancy of the marital residence prior to a partition sale. In holding that there had been no ouster, the Appellate Division emphasized that the ex-wife had left voluntarily, and was partially responsible for delaying the sale of the property. Similarly, in Grant v. Grant, 234 A.D.2d 509, the Appellate Division denied ex-husband's request for the rental value of ex-wife's exclusive use and occupancy of the marital residence pending a partition sale. Ex-wife had remarried, triggering a provision in the couple's divorce agreement requiring that the marital residence be sold if either spouse re-wed. The sale was delayed in part because both parties agreed to list the residence for far more than it was worth. When the ex-husband to sue for rent, the court denied his request, noting that he was partially responsible for the delay.

In contrast to Riley and Grant, when courts distribute the proceeds of a partition sale, they are more likely to allow an ex-spouse out of possession to claim the value of possession as an offset against any credit for expenses claimed by the spouse in possession, particularly when the spouse in possession has remarried. For example, in Worthing v. Cossar, 93 A.D.2d 515, the Appellate Division allowed ex-wife, who was living on the partitioned premises with her second husband, to take a credit for taxes and mortgage payments, but held that because ex-husband had effectively been ousted, the value of the wife's possession should be offset against the credit for payments made by the wife. In Worthing, the court exercised its discretion to hold that an offset was appropriate.

In Partition Proceeding, Co-Owner Entitled to Credit for Down Payment

Czernicki v. Lawniczak

NYLJ 6/28/10, p. 27, col. 1

AppDiv., Second Dept.

(memorandum opinion)

In an action for partition and an accounting, plaintiff co-owner appealed from Supreme Court's judgment directing that the proceeds of the partition sale be divided equally among the co-owners. The Appellate Division modified, holding that plaintiff co-owner was entitled to a credit for the down payment he paid at the time of purchase.

Plaintiff and defendant purchased the subject 13-unit apartment building in 1989. Plaintiff paid a down payment and closing costs totaling more than $50,000. Plaintiff alleged that defendant had orally agreed to reimburse him for one-half of that amount, and to undertake management of the building. Plaintiff relied on a written agreement the parties had made with respect to another building a year earlier. The earlier agreement expressly required defendant to repay the down payment and closing costs. The parties filed partnership income tax returns for the years 1989-94 identifying the building as a partnership asset, with each party owning 50% of the partnership's capital. Defendant contended that his contribution to the venture was to be management of the building, and that he was not obligated to repay the deposit. Supreme Court concluded that plaintiff had failed to prove the existence of a partnership and failed to prove that defendant had assumed the obligation to repay half of the down payment. Supreme Court relied in part on the absence of a written agreement like the one the parties had signed with respect to the other building. Plaintiff appealed.

In modifying, the Appellate Division concluded that the tax return, combined with evidence that the parties had joint liability on two mortgages, was sufficient to establish the existence of a partnership. The court then relied on the parties course of conduct in connection with the earlier purchase to establish that defendant had agreed to repay half of the down payment. As a result, the court held that plaintiff was entitled to a credit for the down payment and closing costs, plus interest.

State Regulation of Real Estate Appraisal Not
Pre-Empted By Federal Law

People v. First American Corp.

NYLJ 6/14/10, p. 15,, col. 1

AppDiv., First Dept.

(Opinion by Gonzalez, J.)

In an action by the New York State Attorney General (AG) asserting claims against an appraisal management company under section 63(12) of the Executive Law and section 349 of the General Business Law and for unjust enrichment, the appraisal management company appealed from Supreme Court's denial of its moved to dismiss on pre-emption grounds. The Appellate Division affirmed, holding that neither the Home Owner's Lending Act of 1933 (HOLA) nor the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) pre-empted state regulation in the field of real estate appraisal.

In this action, the AG alleges that Washington Mutual (WaMu) hired defendant appraisal management company and another such company to oversee its appraisal process and provide a structural buffer against conflicts of interest between WaMu and individual appraisers. The AG contends that defendant appraisal management company misled their customers and the public by stating that its appraisals represented independent assessments of market value and that the appraisals were conducted in accordance with professional standards when in fact they had implemented a system that allowed WaMu's loan origination staff to select appraisers who would inflate market value to WaMu's desired target loan amount. The appraisal management company moved to dismiss, contending that the federal statutes place responsibility for oversight of appraisal management companies on the federal Office of Thrift Supervision (OTS). Supreme Court denied the motion, and the appraisal management company appealed.

In affirming, the Appellate Division first disposed of the argument that the two federal statutes themselves pre-empted state regulation of appraisal practices, citing legislative history accompanying FIRREA that emphasized the importance of a combination of federal and state action to assure enforcement of good standards. The court then turned to whether OTS regulations pre-empted state law. The court noted that 12 CFR 560.2(b) includes a list of state laws expressly pre-empted, including regulation of loan fees. The court noted that the AG's claim did not seek to regulate bank fees. The more difficult question involved the effect of 12 CFR 560.2(c), which creates a presumption of pre-emption, with a narrow exception for state laws that only incidentally affect lending operations. The court held that enjoining an appraisal company from abdicating its responsibility to provide unbiased valuations falls within the exception.. Finally, the court rejected the argument that providing real estate appraisal services ia an authorized banking activity under HOLA, and therefore within the exclusive province of OTS regulation (12 USC section 1464(d)(7)(D).

Deed Given Fraudulently Provides Color of Title
Necessary to Support
Adverse Possession Claim

Ziegler v. Serrano

NYLJ 6/24/10, p. 30, col. 3

AppDiv., 3rd Dept.

(Opinion by Peters, J.)

In an action to quiet title based on adverse possession, true owner appealed from Supreme Court's award of summary judgment to adverse possessors. The Appellate Division affirmed, holding that even if the deed to adverse possessors had been fraudulent, possessors had no knowledge of the fraud.

True owner and her then-husband purchased the disputed parcel in 1972. Ten years later, true owner left without informing her husband where she was going. He obtained a divorce, granted upon true owner's default. He then brought an action to partition the marital property, and he was awarded title in 1985, again by virtue of a default judgment. A month later, he conveyed the disputed parcel to adverse possessors. In 1992, however, after true owner sought to vacate the divorce judgment and the partition judgment, the Appellate Division held that service was improper and vacated both judgments. True owner then brought an action challenging adverse possessors' title to the land, but the action was dismissed for failure to prosecute. In 2008, adverse possessors brought the instant action to quiet title to the land. Supreme Court awarded summary judgment to adverse possessors, concluding that the 1992 judgment was entitled to res judicata effect. True owner appealed.

In affirming, the Appellate Division first concluded that the 1992 dismissal was not on the merits, and therefore not entitled to res judicata effect. But the court concluded that adverse possessors had established all of the requisites to support their adverse possession claim. In addition to occupying the property continuously and exclusively since 1985, they had taken numerous actions consistent with ownership, including major improvements. Finally, they occupied under a claim of right, conferred by their deed and the dismissal of the 1992 action. The court rejected true owner's argument that because her husband's conveyance was fraudulent, the adverse possessors could not succeed on their adverse possession claim. The court noted that a deed by one purporting to have authority to convey provides the color of title necessary to support an adverse possession claim, and emphasized that in this case, true owner had come forward with no evidence to suggest that adverse possessors had any knowledge of fraud.