Real Property Law

Failure to Disclose Impending Condemnation Does Not Constitute Fraud

Beach 104th Street Realty, Inc. v. Kisslev-Mazel Realty, LLC
NYLJ 8/30/2010, NYLJ p. 21, col. 6 AppDiv, Second Dept. (memorandum opinion).

In purchaser's action against seller for fraud, seller appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division reversed, holding that seller's failure to disclose the impending condemnation of the land did not constitute fraud.

Purchaser contracted to buy two adjacent parcels of land in Queens for the purpose of building two- or three-family attached or semi-detached dwellings for sale. Purchaser paid more than $4 million for the two parcels. The contract asserted that purchaser had completed a full investigation of the property, and had not relied on any representations by seller. The contract also made provision for condemnation before the closing. After the sale closed on Oct. 14, 2005, purchaser obtained a building permits from the Department of Buildings during the period from July to October 2006. Plaintiffs had demolished the existing structure and completed more than 50% of the new construction, at a cost of $2,460,000, when, on Jan. 4, 2007, purchaser received a petition from the City of New York to acquire the properties through condemnation. The city's petition recited that the condemnation process had begun with an application from two city departments in 2002, an application that was approved by the City Planning Commission, after public hearing, on Feb. 2, 2005. The petition also recited that the Deputy Mayor had approved the acquisition on April 13, 2005. As a result of the city's petition, the Supreme Court vested title to the properties with the city as of March 23, 2007. Purchaser then filed a notice of claim with the city, and the city agreed to pay purchaser $10,900,000 for the loss purchaser suffered in connection with the condemnation. Purchaser to finalizing its settlement with the city, purchaser brought this action against seller for fraud in failing to disclose the condemnation proceeding before the contract. Both purchaser and seller moved for summary judgment, and Supreme Court denied both motions. Seller appealed from denial of its summary judgment motion.

In reversing, the Appellate Division emphasized that seller made no affirmative representation about the status of the property, and did not thwart purchaser's efforts to discover the city's condemnation plans, which were a matter of public record. The court indicated that silence alone would not give rise to a fraud claim, and to prevail on a claim of active concealment, a purchaser would have to demonstrate that the seller thwarted purchaser's efforts to investigate. Here, because purchaser could have discovered the condemnation through the exercise of due diligence, purchaser could not prevail on its fraud claim, and seller was entitled to summary judgment.

COMMENT

In an arm's-length real property transaction, the mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as fraud. In London v. Courduff, 141 A.D.2d 803, the court held that the seller was under no duty to disclose the fact that one of the vacant lots sold had been used as a land fill because the seller was merely silent and did not thwart the purchasers from finding this out.

When the seller makes a true, but misleading, disclosure about the premises, courts have held that that conduct may rise to the level of “active concealment,” requiring the seller to provide more complete information concerning the property. In Scharf v. Tiegerman, 166 A.D.2d 697, the court held that when the sellers provided a three-family dwelling certificate of occupancy to the purchaser, the sellers assumed a duty to disclose the fact that the house was under investigation by the city in contemplation of revoking its three-family status. Failure to disclose that fact entitled purchaser to recover damages for fraud. Also, in Bethka v. Jensen, 250 A.D.2d 887, the court held that seller was not entitled to summary judgment on purchaser's fraud claim because questions of fact existed about whether seller's failure to disclose the fact that the sewer system was in the process of being connected with an inferior sewer system constituted a material misrepresentation in light of seller's action in showing the purchasers an annual sewer tax bill showing the that the premises was located in the sewer district preferred by purchasers.

Even when seller has engaged in active concealment, the purchaser is not entitled to recover unless the information concealed is peculiarly within the knowledge of the seller. Thus, in Bethka, supra, the court held that questions of fact remained about whether a reasonable inquiry by purchaser would have revealed the truth about the sewer system.

Yuppie Puppy Pet Products, Inc. v. Street Smart Realty, LLC
NYLJ 8/25/10, AppDiv., First Dept. (Acosta, J.)

In tenant's action against landlord, mortgagee appealed from Supreme Court's refusal to permit mortgagee to intervene. The Appellate Division reversed and granted the motion to intervene, emphasizing that judicial resolution of the dispute between landlord and tenant could impair mortgagee's interest in the premises.

The family of tenant's president sold the subject parcel on West 86th Street in Manhattan to current landlord. The latter financed the purchase with a $20,853,750 mortgage from mortgagee. After the transfer, landlord and tenant entered into a series of new lease arrangements, and when those arrangements appeared untenable, tenant agreed to surrender the premises altogether in return for a payment of $6 million from landlord. In May 2008, tenant brought the instant action against landlord, contending that landlord had not delivered the balance of $4,900,000 due on the contract. Tenant sought to impose a retroactive lien on the premises, and an order declaring that it could continue to occupy the premises rent-free until the $4,900,000 was paid. Meanwhile, landlord defaulted on the mortgage. Mortgagee then sought to intervene in the action between landlord and tenant, but the court denied mortgagee's motion, stating that mortgagee should seek relief against landlord in a foreclosure proceeding. The court subsequently entered judgment in tenant's favor, entitling tenant to remain in the premises rent-free. Meanwhile, mortgagee foreclosed on the property and obtained summary judgment against landlord and all tenants except for the subject tenant. Mortgagee appealed from Supreme Court's denial of its motion to intervene.

In reversing, the Appellate Division relied on CPLR 1012(a), which gives a person a right to intervene when representation of that person's interest may be inadequate and the party may be bound by the judgment, or where the action involves the disposition of title to property and the person may be adversely affected by the judgment. In this case, the court emphasized tenant's aggressive use of the judgment, in this case to prevent mortgagee from obtaining relief in the foreclosure action. The court held that tenant could not, on the one hand, argue that the judgment is a defense to the foreclosure action, and, on the other hand, argue that the judgment would not adversely affect mortgagee. Here, because of the potential effect of the judgment on mortgagee's interest, the court held that mortgagee was entitled to intervene.

Failure to Disclose Impending Condemnation Does Not Constitute Fraud

Beach 104th Street Realty, Inc. v. Kisslev-Mazel Realty, LLC
NYLJ 8/30/2010, NYLJ p. 21, col. 6 AppDiv, Second Dept. (memorandum opinion).

In purchaser's action against seller for fraud, seller appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division reversed, holding that seller's failure to disclose the impending condemnation of the land did not constitute fraud.

Purchaser contracted to buy two adjacent parcels of land in Queens for the purpose of building two- or three-family attached or semi-detached dwellings for sale. Purchaser paid more than $4 million for the two parcels. The contract asserted that purchaser had completed a full investigation of the property, and had not relied on any representations by seller. The contract also made provision for condemnation before the closing. After the sale closed on Oct. 14, 2005, purchaser obtained a building permits from the Department of Buildings during the period from July to October 2006. Plaintiffs had demolished the existing structure and completed more than 50% of the new construction, at a cost of $2,460,000, when, on Jan. 4, 2007, purchaser received a petition from the City of New York to acquire the properties through condemnation. The city's petition recited that the condemnation process had begun with an application from two city departments in 2002, an application that was approved by the City Planning Commission, after public hearing, on Feb. 2, 2005. The petition also recited that the Deputy Mayor had approved the acquisition on April 13, 2005. As a result of the city's petition, the Supreme Court vested title to the properties with the city as of March 23, 2007. Purchaser then filed a notice of claim with the city, and the city agreed to pay purchaser $10,900,000 for the loss purchaser suffered in connection with the condemnation. Purchaser to finalizing its settlement with the city, purchaser brought this action against seller for fraud in failing to disclose the condemnation proceeding before the contract. Both purchaser and seller moved for summary judgment, and Supreme Court denied both motions. Seller appealed from denial of its summary judgment motion.

In reversing, the Appellate Division emphasized that seller made no affirmative representation about the status of the property, and did not thwart purchaser's efforts to discover the city's condemnation plans, which were a matter of public record. The court indicated that silence alone would not give rise to a fraud claim, and to prevail on a claim of active concealment, a purchaser would have to demonstrate that the seller thwarted purchaser's efforts to investigate. Here, because purchaser could have discovered the condemnation through the exercise of due diligence, purchaser could not prevail on its fraud claim, and seller was entitled to summary judgment.

COMMENT

In an arm's-length real property transaction, the mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as fraud. In London v. Courduff, 141 A.D.2d 803, the court held that the seller was under no duty to disclose the fact that one of the vacant lots sold had been used as a land fill because the seller was merely silent and did not thwart the purchasers from finding this out.

When the seller makes a true, but misleading, disclosure about the premises, courts have held that that conduct may rise to the level of “active concealment,” requiring the seller to provide more complete information concerning the property. In Scharf v. Tiegerman, 166 A.D.2d 697, the court held that when the sellers provided a three-family dwelling certificate of occupancy to the purchaser, the sellers assumed a duty to disclose the fact that the house was under investigation by the city in contemplation of revoking its three-family status. Failure to disclose that fact entitled purchaser to recover damages for fraud. Also, in Bethka v. Jensen, 250 A.D.2d 887, the court held that seller was not entitled to summary judgment on purchaser's fraud claim because questions of fact existed about whether seller's failure to disclose the fact that the sewer system was in the process of being connected with an inferior sewer system constituted a material misrepresentation in light of seller's action in showing the purchasers an annual sewer tax bill showing the that the premises was located in the sewer district preferred by purchasers.

Even when seller has engaged in active concealment, the purchaser is not entitled to recover unless the information concealed is peculiarly within the knowledge of the seller. Thus, in Bethka, supra, the court held that questions of fact remained about whether a reasonable inquiry by purchaser would have revealed the truth about the sewer system.

Yuppie Puppy Pet Products, Inc. v. Street Smart Realty, LLC
NYLJ 8/25/10, AppDiv., First Dept. (Acosta, J.)

In tenant's action against landlord, mortgagee appealed from Supreme Court's refusal to permit mortgagee to intervene. The Appellate Division reversed and granted the motion to intervene, emphasizing that judicial resolution of the dispute between landlord and tenant could impair mortgagee's interest in the premises.

The family of tenant's president sold the subject parcel on West 86th Street in Manhattan to current landlord. The latter financed the purchase with a $20,853,750 mortgage from mortgagee. After the transfer, landlord and tenant entered into a series of new lease arrangements, and when those arrangements appeared untenable, tenant agreed to surrender the premises altogether in return for a payment of $6 million from landlord. In May 2008, tenant brought the instant action against landlord, contending that landlord had not delivered the balance of $4,900,000 due on the contract. Tenant sought to impose a retroactive lien on the premises, and an order declaring that it could continue to occupy the premises rent-free until the $4,900,000 was paid. Meanwhile, landlord defaulted on the mortgage. Mortgagee then sought to intervene in the action between landlord and tenant, but the court denied mortgagee's motion, stating that mortgagee should seek relief against landlord in a foreclosure proceeding. The court subsequently entered judgment in tenant's favor, entitling tenant to remain in the premises rent-free. Meanwhile, mortgagee foreclosed on the property and obtained summary judgment against landlord and all tenants except for the subject tenant. Mortgagee appealed from Supreme Court's denial of its motion to intervene.

In reversing, the Appellate Division relied on CPLR 1012(a), which gives a person a right to intervene when representation of that person's interest may be inadequate and the party may be bound by the judgment, or where the action involves the disposition of title to property and the person may be adversely affected by the judgment. In this case, the court emphasized tenant's aggressive use of the judgment, in this case to prevent mortgagee from obtaining relief in the foreclosure action. The court held that tenant could not, on the one hand, argue that the judgment is a defense to the foreclosure action, and, on the other hand, argue that the judgment would not adversely affect mortgagee. Here, because of the potential effect of the judgment on mortgagee's interest, the court held that mortgagee was entitled to intervene.