Real Property Law

Title Agent May Be Liable for Failure to Record Deeds and Mortgages

Federal Deposit Insurance Corp. v. The Mortgage Zone, Inc.

NYLJ 10/12/10

U.S.Dist Ct., EDNY

(Platt, J.)

In an action by the FDIC, as receiver for AmTrust, alleging that a variety of defendants defrauded AmTrust in accordance with 19 mortgage loans, one of the defendants ' an agent for a title insurance company ' moved to dismiss the complaint against it. The court dismissed with respect to AmTrust's breach of fiduciary duty claim, but not with respect to a claim of negligence for failure to record deeds and mortgages.

In connection with a variety of mortgage loans, AmTrust disbursed funds to its lawyer and closing agent, defendant Reskakis. Icon, a corporate agent for a title company, issued title commitments with respect to the properties, representing that it would obtain title insurance policies from the title company. Icon never obtained the title insurance policies (and with respect to at least one of the properties, never issued a commitment). Nevertheless, Reskakis closed on the loans. The complaint alleges that Icon was present at the closing. Neither Reskakis nor Icon ever recorded the deeds or mortgages, and never recorded satisfactions of outstanding mortgages paid off with the funds advanced by AmTrust. Apparently, the properties were subsequently resold, the loans went into default, and AmTrust was unable to foreclose because its interest had never been recorded. AmTrust then brought this action against Reskakis, Icon, and a variety of other alleged participants in the fraud. Icon moved to dismiss the claims against it.

The court first addressed, and dismissed, AmTrust's claim that Icon had breached its fiduciary duty by failure to obtain title insurance policies. The court relied on an agreement between Reskakis and Icon in which Reskakis acknowledged that it was holding sufficient funds in escrow to satisfy outstanding title issues, and to satisfy any mortgage payoffs. Reskakis also agreed to hold Icon harmless in the event of any claim. The court emphasized that this letter established that there were outstanding title issues, and that because Reskakis was acting as AmTrust's agent, knowledge of those issues should be imputed to AmTrust. Icon was relieved of any obligations to provide title insurance when it notified Reskakis (and therefore AmTrust) that the properties were encumbered in some fashion. The court also held that failure to procure title insurance was not, in any event, the proximate cause of AmTrust's losses, because the title insurance would have protected only against past claims, not against title issues that would arise subsequent to AmTrust's acquisition of the mortgages.

The court then turned to AmTrust's claims that Icon had breached its fiduciary duty, and had acted negligently, by failing to record the deeds, mortgages, and satisfactions. The court dismissed the fiduciary duty claim, but held that the negligence claim would withstand a motion to dismiss, noting that if Icon was negligent, then its failure to record would be a cause of AmTrust's losses.

COMMENT

Although a title insurance policy does not obligate the title insurer to record the deed or mortgage it insures, when an insurer undertakes to record a deed or mortgage, it is liable for doing so negligently. In Cruz v. Commonwealth Land Title Ins. Co., 157 A.D.2d 333, title insurer admitted that it had a duty to record the deed it had insured, but argued that the duty arose from the policy itself, and was therefore subject to the policy's liability limits. The court rejected the insurer's contention, holding the insurer liable when its agent failed to record the deed and another party recorded a subsequent deed from the same seller. The court held that since the insurer's duty to record did not arise from the policy itself, damages should not be limited by the policy.

When a title agency's closer undertakes to record a mortgage and fails to record in a timely fashion, the title agency, but not the title insurance company, is liable for the closer's negligence. In Crupi v. Newell and Talarico Title Agency, Inc., 14 Misc.3d 1225(A), Lawyers Title Insurance Corporation issued a title insurance policy through its agent Newell for a mortgage on a property. That mortgage was recorded. At closing, an agent of Newell agreed and took payment to record a Spreader Agreement for plaintiff so that another property would serve as additional security for the mortgage. Newell recorded the Spreader Agreement three years later, after another mortgage had been filed against the property. Lawyers Title Insurance Corporation argued that it had no duty to record the agreement. The court held that the title insurance company was not negligent for failing to record the agreement because it satisfied its only obligation ' to make sure that there was no defect of title ' under its policy. The court held that Newell would be liable for the negligence of its agent, and found that questions of fact remained as to whether Newell acted negligently.

In a subsequent case, a court has rejected the argument that the title insurer is liable for the negligence of its agent, citing the limited agency relationship between the title insurer and a title agency. In Lucas v. Kensington Abstract LLC, 20 Misc.3d 1135(A), plaintiff held a title insurance policy on a mortgage with First American Title Insurance Company. Kensington, an agent of First American, was present during closing and took delivery of the mortgage. Kensington agreed to record the mortgage, but failed to do so for two years, during which additional encumbrances were filed on the property. Plaintiff argued that due to the principal-agent relationship, First American should be held liable for Kensington's negligence to record title in a timely manner. The court rejected plaintiff's argument and held that First American and Kensington only had a limited agency relationship, which did not impose on First American the duty to record the mortgage.

Cotenant Not Entitled to Credit for Voluntary Payments

Turrisi v. Severino

NYLJ 11/1/10, p. 26, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action for partition and sale of real property, plaintiff Turrisi appealed from Supreme Court's failure to award him a credit for payments made toward carrying charges, repairs, and improvements. The Appellate Division affirmed, holding that a cotenant is not entitled to a credit for voluntary payments made without expectation of reimbursement.

Plaintiff Turrisi and defendant Severino, who were never married, bought the subject property in 2001 as tenants in common. They agreed, in writing, that upon sale or disposition of the property, defendant Severino would receive the first $27,000, and the remaining proceeds would be divided equally. The parties then agreed orally that plaintiff Turrisi would be responsible for household expenses in excess of $300 per month, including mortgage, taxes, and insurance. Upon partition sale of the property, Supreme Court awarded defendant Severino the first $27,000, and directed equal division of the rest. Plaintiff Turrisi appealed.

In affirming, the Appellate Division noted that partition actions are equitable in nature and a court may compel the parties to do equity among themselves. The court then indicated that agreements between the parties should generally be given effect, and concluded by observing that voluntary payments made by a party who does not expect reimbursement are not refundable in partition. In this case, the court emphasized that Supreme Court had divided the property in accordance with the parties' agreements, and that plaintiff Turrisi had not alleged facts sufficient to require further adjustments.

COMMENT

When the parties have made an express agreement that one party will pay certain expenses related to jointly owned property, New York courts will construe the agreement to prevent that party from receiving a credit for the payments made. Thus, in Oliva v. Oliva, 136 A.D.2d 611, a partition action between divorced co-tenants, the court held that since the plaintiff agreed to pay the mortgage on the property in the prior judgment of divorce, he was not entitled to credit for mortgage payments made after the date of the divorce.

In the absence of an express agreement, a co-tenant may obtain credit for repairs that are necessary to protect or preserve the property. In Worthing v. Cossar, 93 A.D.2d 515, a partition action between co-tenants, the court held that the defendant was entitled to credit for installing siding on the house because the siding was necessary to protect the house from water leaks.

A co-tenant may obtain credit for down payment and mortgage payment expenditures made in excess of his interest in the property, but may not obtain credit for expenditures made after ousting the other co-tenant. In Brady v. Varrone, 65 A.D.3d 600, a partition action between co-tenants, the plaintiff paid one-half of the down payment and one-half of the mortgage payments even though he only held a one-third interest in the property. The court held that the plaintiff was entitled to a credit for sums paid in excess of his interest in the property. By contrast, in Johnston v. Martin, 183 A.D.2d 1019, the court held that after the defendant ousted the plaintiff by changing the locks on the doors to their house, the defendant became liable for all charges on the property, and thus was not entitled to credit for one-half of the tax, mortgage and insurance payments made by the defendant from the date of the ouster. The court reasoned that after ousting plaintiff, defendant became obligated to plaintiff for half the reasonable rental value of the premises, and concluded that in the absence of record evidence, that value would be treated as equal to the payments made by defendant, eliminating any entitlement to a credit for those payments.

Acceptance of Benefits Precludes Contract Vendor from Contending That Contract Was Not Properly Approved

ER-Loom Realty, LLC v. Prelosh Realty, LLC

NYLJ 10/28/10, p. 27, col. 5

AppDiv., First Dept.

(memorandum opinion)

In an action by contract vendees for specific performance of a contract for sale of real property, contract vendors appealed from Supreme Court's award of specific performance. The Appellate Division affirmed, holding that acceptance of benefits precluded vendors from claiming that the transaction was not properly approved by their members.

Contract vendees are two limited liability companies, formed to take title to the two apartment buildings that are the subject of the dispute. Contract vendors are also two limited liability companies. The principals in the contract vendors were the mother and father of the principal in the contract vendee. The transaction was structured so that father would refinance the two buildings with 30-year mortgages, and then sell the properties to son's companies pursuant to an installment sale. The purchase was to be $5 million, payable in monthly installments of $17,000, to be paid in addition to, and at the same time, as the monthly mortgage payments. The entire family was present when the handwritten contract was signed, and son made a number of mortgage payments before contract vendors repudiated the deal. Contract vendees then sought specific performance.

In affirming Supreme Court's award of specific performance, the Appellate Division rejected contract vendors' claim that the transaction was not approved by a majority vote of their members. The court held that the acceptance of benefits in the form of monthly installment payments constituted ratification of the contract, and undermined their claim that the transaction was not authorized. The court also rejected the argument that the payments were made with contract vendors' own money, noting unrefuted evidence that the cash flow from the buildings was insufficient to cover the operating expenses and the monthly payments. As a result, contract vendees were entitled to specific performance.

Title Agent May Be Liable for Failure to Record Deeds and Mortgages

Federal Deposit Insurance Corp. v. The Mortgage Zone, Inc.

NYLJ 10/12/10

U.S.Dist Ct., EDNY

(Platt, J.)

In an action by the FDIC, as receiver for AmTrust, alleging that a variety of defendants defrauded AmTrust in accordance with 19 mortgage loans, one of the defendants ' an agent for a title insurance company ' moved to dismiss the complaint against it. The court dismissed with respect to AmTrust's breach of fiduciary duty claim, but not with respect to a claim of negligence for failure to record deeds and mortgages.

In connection with a variety of mortgage loans, AmTrust disbursed funds to its lawyer and closing agent, defendant Reskakis. Icon, a corporate agent for a title company, issued title commitments with respect to the properties, representing that it would obtain title insurance policies from the title company. Icon never obtained the title insurance policies (and with respect to at least one of the properties, never issued a commitment). Nevertheless, Reskakis closed on the loans. The complaint alleges that Icon was present at the closing. Neither Reskakis nor Icon ever recorded the deeds or mortgages, and never recorded satisfactions of outstanding mortgages paid off with the funds advanced by AmTrust. Apparently, the properties were subsequently resold, the loans went into default, and AmTrust was unable to foreclose because its interest had never been recorded. AmTrust then brought this action against Reskakis, Icon, and a variety of other alleged participants in the fraud. Icon moved to dismiss the claims against it.

The court first addressed, and dismissed, AmTrust's claim that Icon had breached its fiduciary duty by failure to obtain title insurance policies. The court relied on an agreement between Reskakis and Icon in which Reskakis acknowledged that it was holding sufficient funds in escrow to satisfy outstanding title issues, and to satisfy any mortgage payoffs. Reskakis also agreed to hold Icon harmless in the event of any claim. The court emphasized that this letter established that there were outstanding title issues, and that because Reskakis was acting as AmTrust's agent, knowledge of those issues should be imputed to AmTrust. Icon was relieved of any obligations to provide title insurance when it notified Reskakis (and therefore AmTrust) that the properties were encumbered in some fashion. The court also held that failure to procure title insurance was not, in any event, the proximate cause of AmTrust's losses, because the title insurance would have protected only against past claims, not against title issues that would arise subsequent to AmTrust's acquisition of the mortgages.

The court then turned to AmTrust's claims that Icon had breached its fiduciary duty, and had acted negligently, by failing to record the deeds, mortgages, and satisfactions. The court dismissed the fiduciary duty claim, but held that the negligence claim would withstand a motion to dismiss, noting that if Icon was negligent, then its failure to record would be a cause of AmTrust's losses.

COMMENT

Although a title insurance policy does not obligate the title insurer to record the deed or mortgage it insures, when an insurer undertakes to record a deed or mortgage, it is liable for doing so negligently. In Cruz v. Commonwealth Land Title Ins. Co., 157 A.D.2d 333, title insurer admitted that it had a duty to record the deed it had insured, but argued that the duty arose from the policy itself, and was therefore subject to the policy's liability limits. The court rejected the insurer's contention, holding the insurer liable when its agent failed to record the deed and another party recorded a subsequent deed from the same seller. The court held that since the insurer's duty to record did not arise from the policy itself, damages should not be limited by the policy.

When a title agency's closer undertakes to record a mortgage and fails to record in a timely fashion, the title agency, but not the title insurance company, is liable for the closer's negligence. In Crupi v. Newell and Talarico Title Agency, Inc., 14 Misc.3d 1225(A), Lawyers Title Insurance Corporation issued a title insurance policy through its agent Newell for a mortgage on a property. That mortgage was recorded. At closing, an agent of Newell agreed and took payment to record a Spreader Agreement for plaintiff so that another property would serve as additional security for the mortgage. Newell recorded the Spreader Agreement three years later, after another mortgage had been filed against the property. Lawyers Title Insurance Corporation argued that it had no duty to record the agreement. The court held that the title insurance company was not negligent for failing to record the agreement because it satisfied its only obligation ' to make sure that there was no defect of title ' under its policy. The court held that Newell would be liable for the negligence of its agent, and found that questions of fact remained as to whether Newell acted negligently.

In a subsequent case, a court has rejected the argument that the title insurer is liable for the negligence of its agent, citing the limited agency relationship between the title insurer and a title agency. In Lucas v. Kensington Abstract LLC, 20 Misc.3d 1135(A), plaintiff held a title insurance policy on a mortgage with First American Title Insurance Company. Kensington, an agent of First American, was present during closing and took delivery of the mortgage. Kensington agreed to record the mortgage, but failed to do so for two years, during which additional encumbrances were filed on the property. Plaintiff argued that due to the principal-agent relationship, First American should be held liable for Kensington's negligence to record title in a timely manner. The court rejected plaintiff's argument and held that First American and Kensington only had a limited agency relationship, which did not impose on First American the duty to record the mortgage.

Cotenant Not Entitled to Credit for Voluntary Payments

Turrisi v. Severino

NYLJ 11/1/10, p. 26, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action for partition and sale of real property, plaintiff Turrisi appealed from Supreme Court's failure to award him a credit for payments made toward carrying charges, repairs, and improvements. The Appellate Division affirmed, holding that a cotenant is not entitled to a credit for voluntary payments made without expectation of reimbursement.

Plaintiff Turrisi and defendant Severino, who were never married, bought the subject property in 2001 as tenants in common. They agreed, in writing, that upon sale or disposition of the property, defendant Severino would receive the first $27,000, and the remaining proceeds would be divided equally. The parties then agreed orally that plaintiff Turrisi would be responsible for household expenses in excess of $300 per month, including mortgage, taxes, and insurance. Upon partition sale of the property, Supreme Court awarded defendant Severino the first $27,000, and directed equal division of the rest. Plaintiff Turrisi appealed.

In affirming, the Appellate Division noted that partition actions are equitable in nature and a court may compel the parties to do equity among themselves. The court then indicated that agreements between the parties should generally be given effect, and concluded by observing that voluntary payments made by a party who does not expect reimbursement are not refundable in partition. In this case, the court emphasized that Supreme Court had divided the property in accordance with the parties' agreements, and that plaintiff Turrisi had not alleged facts sufficient to require further adjustments.

COMMENT

When the parties have made an express agreement that one party will pay certain expenses related to jointly owned property, New York courts will construe the agreement to prevent that party from receiving a credit for the payments made. Thus, in Oliva v. Oliva, 136 A.D.2d 611, a partition action between divorced co-tenants, the court held that since the plaintiff agreed to pay the mortgage on the property in the prior judgment of divorce, he was not entitled to credit for mortgage payments made after the date of the divorce.

In the absence of an express agreement, a co-tenant may obtain credit for repairs that are necessary to protect or preserve the property. In Worthing v. Cossar , 93 A.D.2d 515, a partition action between co-tenants, the court held that the defendant was entitled to credit for installing siding on the house because the siding was necessary to protect the house from water leaks.

A co-tenant may obtain credit for down payment and mortgage payment expenditures made in excess of his interest in the property, but may not obtain credit for expenditures made after ousting the other co-tenant. In Brady v. Varrone, 65 A.D.3d 600, a partition action between co-tenants, the plaintiff paid one-half of the down payment and one-half of the mortgage payments even though he only held a one-third interest in the property. The court held that the plaintiff was entitled to a credit for sums paid in excess of his interest in the property. By contrast, in Johnston v. Martin, 1 83 A.D.2d 1019, the court held that after the defendant ousted the plaintiff by changing the locks on the doors to their house, the defendant became liable for all charges on the property, and thus was not entitled to credit for one-half of the tax, mortgage and insurance payments made by the defendant from the date of the ouster. The court reasoned that after ousting plaintiff, defendant became obligated to plaintiff for half the reasonable rental value of the premises, and concluded that in the absence of record evidence, that value would be treated as equal to the payments made by defendant, eliminating any entitlement to a credit for those payments.

Acceptance of Benefits Precludes Contract Vendor from Contending That Contract Was Not Properly Approved

ER-Loom Realty, LLC v. Prelosh Realty, LLC

NYLJ 10/28/10, p. 27, col. 5

AppDiv., First Dept.

(memorandum opinion)

In an action by contract vendees for specific performance of a contract for sale of real property, contract vendors appealed from Supreme Court's award of specific performance. The Appellate Division affirmed, holding that acceptance of benefits precluded vendors from claiming that the transaction was not properly approved by their members.

Contract vendees are two limited liability companies, formed to take title to the two apartment buildings that are the subject of the dispute. Contract vendors are also two limited liability companies. The principals in the contract vendors were the mother and father of the principal in the contract vendee. The transaction was structured so that father would refinance the two buildings with 30-year mortgages, and then sell the properties to son's companies pursuant to an installment sale. The purchase was to be $5 million, payable in monthly installments of $17,000, to be paid in addition to, and at the same time, as the monthly mortgage payments. The entire family was present when the handwritten contract was signed, and son made a number of mortgage payments before contract vendors repudiated the deal. Contract vendees then sought specific performance.

In affirming Supreme Court's award of specific performance, the Appellate Division rejected contract vendors' claim that the transaction was not approved by a majority vote of their members. The court held that the acceptance of benefits in the form of monthly installment payments constituted ratification of the contract, and undermined their claim that the transaction was not authorized. The court also rejected the argument that the payments were made with contract vendors' own money, noting unrefuted evidence that the cash flow from the buildings was insufficient to cover the operating expenses and the monthly payments. As a result, contract vendees were entitled to specific performance.