Real Property Law

Mis-indexed Mortgage Does Not Provide Constructive Notice

PHH Mortgage Corp. v. Peters

NYLJ 1/24/11

Supreme Court, N.Y. Cty.

(Madden, J.)

In an action to foreclose a mortgage, defendant fee owner and subsequent mortgagee moved for summary judgment dismissing the complaint against them, and also moved for summary judgment on their counterclaim for a declaration that plaintiff-mortgagee's mortgage is subject to and subordinate to the owner's deed and the subsequent mortgage. The court granted the summary judgment motion, concluding that because the original mortgage was misindexed, it did not provide constructive notice to subsequent purchasers and mortgagees.

In 2002, Peters gave a mortgage on his condominium unit in the principal amount of $299,915 to MERS as nominee for Merrill Lynch Credit. The mortgage was recorded, but mis-indexed under Block 836, Lot 2095 instead of the correct designation, Block 936, Lot 2095. In 2003, Peters sold the unit to Choy for $414,000. The purchaser was financed by two mortgages from Chase in the amounts of $322,700 and $50,800. The title search commissioned by Choy's lawyer did not disclose the mis-indexed mortgage. Choy's deed and the Chase mortgages were properly recorded on Aug. 11, 2003. Merrill Lynch Credit assigned the original mortgage to PHH on Nov. 4, 2009, and PHH brought this foreclosure action two days later. Subsequently, on Nov. 27, 2009, PHH recorded its assignment of mortgage under the proper block and lot number. Choy and Chase sought summary judgment, submitting affidavits that they had no actual knowledge of the Merrill Lynch Credit mortgage until they received notice of the PHH foreclosure action.

In awarding summary judgment to Choy and Chase, the court held that a misindexed mortgage does not provide constructive notice to subsequent purchasers. The court rejected PHH's argument that in light of New York City's ACRIS computerized recording system, a simple use of the “search by name” option would have revealed that Peters had mortgaged the unit to Merrill Lynch, noting that even if the search had been performed, the only mortgage listed would have had the incorrect block number. The court also rejected PHH's argument that discovery was necessary to explore the claims by Choy and Chase that they had no knowledge of the mortgage.

COMMENT

An improperly indexed mortgage is deemed outside the chain of title and will not provide constructive notice to subsequent mortgagees. In Coco v. Ranalletta, 305 A.D.2d 1082 (4th Dep't 2003), for example, the court held that a senior mortgage that was incorrectly indexed due to a misspelling of the mortgagor's name lost priority to a junior, correctly-indexed mortgage. Id. Because the misindexed senior mortgage fell outside of the chain of title, the subsequent mortgagee could not be charged with constructive notice of the superior lien. Id. Such a limitation on constructive notice is designed to protect purchasers from the “danger that a particular outstanding interest will be overlooked because it was recorded outside of the direct 'chain of title.'” Andy Assocs., Inc. v. Bankers Trust Co., 49 N.Y.2d 13, 24 (1979).

But now that computerized record systems allow title searchers quickly and easily to find even documents outside of the traditional “chain of title,” it is unclear whether constructive notice will remain limited to documents within that direct chain of title. Although it has not yet addressed the issue of computerized searches, the Court of Appeals has indicated that purchasers can be charged with constructive notice of documents outside of their direct chain of title where those purchasers have at their disposal a system that enables them “readily to find all conveyances ' which affect a particular parcel of land.” Andy Assocs., 49 N.Y.2d at 24 (holding that constructive notice extended to mortgage document outside subsequent mortgagee's direct chain of title where document was discoverable through “block and lot” search). Under such circumstances, the court noted, “there is no logical reason to afford potential purchasers additional protection by applying the time-honored [chain of title] rule.” Id. That holding suggests that purchasers can be charged with constructive notice of all instruments discoverable via computerized search ' even those outside the direct chain of title.

More recent cases, however, indicate that courts may be hesitant to extend constructive notice to those documents outside the chain of title that are discoverable only through computerized searches. See Coco, 305 A.D.2d at 1082 (holding that where mortgage was improperly indexed due to misspelling (“Ranaletta” instead of “Ranalletta”), mortgage failed to provide constructive notice, even though computerized record system allowed for “phonetic” searches that could have revealed mortgage); Big Fun, L.L.C. v. Gross, N.Y.L.J. 8/12/98, p. 23, col. 5, Sup. Ct., N.Y. Cty (holding that judgment docketed as lien under misspelled name did not provide constructive notice even though computerized search of records for alternate spellings may have been successful). Courts have cautioned that requiring additional computerized searches would introduce “uncertainty” regarding the types of searches that purchasers must perform before a record can be held to have been searched sufficiently. See Coco v. Ranalletta, 189 Misc. 2d 535, 537 (Sup. Ct. Monroe County 2001); Big Fun, N.Y.L.J. 8/12/98, p. 23, col. 5. Those cases, however, dealt only with a party's responsibility to search for name variations in cases of misspellings; whether courts will hold similarly in other contexts remains to be seen.

Dispute About Mortgagor's Rights Precludes Cancellation of Mortgagee's Notice of Pendency

Citimortgage, Inc. v. McNeil

NYLJ 2/8/11

Supreme Ct., Kings Cty.

(Hinds-Radix, J.)

In mortgagee's action to vacate an erroneously issued satisfaction of its mortgage, a non-party moved to cancel mortgagee's notice of pendency and discharge the mortgage or record on the ground that the mortgagor had no authority to execute the mortgage. The court denied the non-party's motion, holding that questions remained about mortgagor's right to the disputed property.

Dickens, the former owner of the subject property, died on Feb. 9, 2006. The following day, her granddaughter, McNeil, purporting to act as executor of Dickens' estate, executed a deed to herself as grantee. Several months later, she executed a mortgage in favor of Fremont to secure a $250,000 loan. The following year, she executed another mortgage, in favor of Citi's predecessor, to secure a $340,000 loan. The proceeds were used, in part, to satisfy the Fremont mortgage. In December 2007, Citi erroneously issued a satisfaction of the mortgage, which was recorded the same month. Then, in May 2008, Citi filed a notice of pendency and brought this action to vacate the satisfaction and restore its mortgage to its original position. Three months later, Dickens' sister, Alston, brought a separate action against McNeil to vacate the Feb. 10 deed McNeil had executed to herself. Alston contended that because no will had been probated, McNeil had not authority to execute the deed. Alston did not name Citi as a party to the action, even though Citi's notice of pendency had been filed. In that action, Supreme Court granted summary judgment to Alston and ordered the city register to cancel and discharge or record the Feb. 10, 2006 deed. Based on that judgment, Alston moved in this action to cancel Citi's notice of pendency and to discharge Citi's mortgage.

In denying Alston's motion, the court emphasized that in considering whether to cancel a notice of pendency under CPLR 6501, a court does not assess the likelihood of success on the merits. Here, because the relief sought by Citi ' cancellation of the satisfaction ' would affect title to the subject property, the notice of pendency was properly filed. The court then noted that none of the grounds for cancellation specified in CPLR 6514 were present in this case. The court then noted that Alston could not invoke its judgment nullifying the deed to McNeil as a basis for cancelling the notice because Alston had not made Citi a party to that proceeding. As a result, the determination in that proceeding could not, as a matter of due process, bind Citi. Finally, the court noted that despite the judgment nullifying the deed, McNeil might still have had a mortgagable interest in the property; even if she had no authority to execute the mortgage as executor, she might still have succeeded to the property as a beneficiary of Dickens' will, and in that event, title would have vested in her at the moment of Dickens' death, not at the time of probate. As a result, Alston was not entitled to cancellation of the notice of pendency or discharge of Citi's mortgage lien.

Statute of Limitations Does Not Bar Mortgagee's Claim

Wells Fargo Bank, N.A. v. Cohen

NYLJ 2/1/11

AppDiv, Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, mortgagee bank appealed from Supreme Court's denial of its summary judgment motion and grant of mortgagor's motion dismissing the complaint on statute of limitations grounds. The Appellate Division modified to reinstate the complaint and grant summary judgment to mortgagee with respect to all payments due after July 1, 2002 ' six years before mortgagee brought the foreclosure action.

Mortgagor first defaulted in payment on the mortgage in June 2000. Mortgagee did not bring the foreclosure action until June 2008. Supreme Court dismissed the complaint, concluding that the action was time-barred because more than six years had elapsed since the last payment was made and the mortgage was accelerated. Mortgagee appealed.

In reversing, the Appellate Division held that with a mortgage payable in installments, the mortgagee has a separate cause of action for each installment, and the statute of limitations begins to run on each installment when that installment becomes due. The court emphasized that neither the note nor the mortgage included a provision automatically accelerating the entire obligation upon a default in making one payment. As a result, when mortgagee brought the foreclosure action in June 2008, only payments due before July 1, 2002 had become time-barred. As to payments that became due after that date, mortgagee was entitled to summary judgment.

COMMENT

When a mortgage agreement includes a clause providing that, upon any default by the debtor, the mortgagee's right to payment is automatically accelerated and the entire amount of the mortgage debt becomes due, the statute of limitations on recovery of the entire debt runs from the moment the default occurs. See National Shawmut Bank v. Sherbrooke, 36 N.Y.S.2d 594 (court held that by the terms of the mortgage, acceleration was immediate upon default and the six-year statute of limitations began to run at that time).

Similarly, when the mortgage gives the mortgagee the option to accelerate mortgage payments rather than providing for automatic acceleration, the statute of limitations on the entire debt runs from the moment the mortgagee exercises its right to accelerate. See Federal National Mortgage v. Mebane, 208 A.D.2d 892, 894 (where the court held that upon exercise of an optional acceleration clause, the entire mortgage debt became due and the statute of limitations began to run).

In contrast, if the mortgage includes no acceleration clause or the mortgagee fails to exercise an optional acceleration clause, separate causes of action for each installment will accrue and the statute of limitations will begin to run on the date each installment becomes due. See Pagano v. Smith, 201 A.D.2d 632. (where the mortgage included an optional acceleration clause that mortgagee had not exercised, court held that foreclosure action was not time-barred as to those installments due within the six years before the action was commenced); see also Utica v. Knox, 71 A.D.2d 763 (where the mortgage did not contain an acceleration provision, court held that the entire mortgage debt did not become due at the time of default, but rather separate actions could be brought and the statute of limitations would begin to run as each installment became due).

When the mortgagee takes action having legal significance, such as the filing of a summons and complaint, the filing of a lis pendens, or a formal notice by the mortgagee, courts have held that mortgagee's action demonstrates an intent to exercise an optional acceleration clause. See Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472; 446 West 44th St. Inc. v. Riverland Holding Corp., 267 A.D. 135, 137. Conversely, action having no immediate legal significance, such as commencing a title search in preparation for a foreclosure action or refusing to accept delinquent payment while at the same time telling mortgagor to see his lawyer, have been found to be insufficient to constitute exercise of an option to accelerate a mortgage. See 446 West 44th St. Inc. v. Riverland Holding Corp., 267 A.D. 135, 137; Matusak v. Bakiorzynski, 128 Misc. 375, 219 N.Y.S. 29.

Insured Entitled to Recover Diminution of Value on Date Litigation Established That She Had No Easement

Appleby v. Chicago Title Insurance Co.

NYLJ 1/18/11

p. 22., col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action on a title insurance policy, landowner appealed from Supreme Court's grant of title insurer's summary judgment motion declaring that title insurer's liability was limited to $59,031. The Appellate Division reversed, holding that the policy provisions entitled landowner to the diminution in the value of her property on the date that litigation established that she had no easement of access to a public road.

In 1997, when landowner became interested in purchasing the subject property, prior owner allegedly told her that the property was benefited by an easement that permitted vehicular access to the Albany Post Road. Before purchasing, landowner also became aware that the servient owner did not agree that the easement permitted vehicle traffic. Landowner then informed its title insurer of the problem, and purchased a title insurance policy that insured that the “outcome of … litigation shall be favorable to the insured and confirm a Right of Vehicular ingress and egress to the insured premises.” The policy also included a “market value rider” to the policy which insured landowner against loss or damage “not exceeding the market value of the premises at the time of loss … ” Landowner subsequently brought a proceeding seeking an injunction against interference with her easement, but it was judicially determined that her easement was limited to a pedestrian right-of-way. She then filed a claim against the title insurer. The latter asserted that landowner was entitled to $59,031, and Supreme Court awarded the insurer summary judgment limiting its liability to that amount. Landowner appealed.

In reversing, the Appellate Division relied on the “market value rider,” noting that the policy defined time of loss as “such date as the homeowner shall have actual knowledge of facts giving rise to a claim … ” Here, the court held that the date was March 23, 2006, the date on which the Court of Appeals denied leave to appeal in landowner's action for an injunction against interference with the easement. As a result, Chicago Title was liable for the diminution in landowner's market value “ from the date of her purchase of the premises until March 23, 2006, not exceeding the market value of the premises as of that latter date.”

COMMENT

In the absence of a market value rider, a purchaser with a claim for complete loss under a title insurance policy is entitled to collect the policy limit, regardless of the purchase price of the subject property. For example, in Rose Development Corp. v. Einhorn, 65 A.D.3d 1115, plaintiff, Rose, sought contribution and indemnification on behalf of its title insurance company from the group that had sold it a property that been improperly foreclosed. After a challenge and appeal from a third-party defendant, the court held that the insurance payout for which plaintiff sought contribution and indemnification was valid even though the payment of $275,000 (the policy limit) was almost double the $150,000 purchase price and less than the $350,000 market value of the property at the time of purchase.

Market value riders expand the protection offered to a purchaser of title insurance by giving the purchaser the option to make a claim either for the value of coverage under the traditional policy or for the market value of the subject property at the time of loss. “Time of loss” has traditionally been interpreted to mean the time when the purchaser becomes aware of a defect in the title. See, e.g., Purcell v. Commonwealth Land Title Ins. Co. 19 A.D.3d 469, where the court found that plaintiff Purcell, who had purchased a property at below market value in a foreclosure sale, was entitled to coverage through his insurance policy in the amount of the market value of the property on the fourth day after he closed on the property. The court found that this was the date that Purcell had “actual knowledge of facts giving rise to a claim” because it was the date on which he learned that the seller may have lost the ability to convey legal title to the land by filing bankruptcy just before the closing date. Id. at 470. It is unclear, however, whether the determination of the “time of loss” was a central question in this case; any additional market value that Purcell sought to protect had accrued immediately at the time of closing due to the nature of the foreclosure sale and was not due to appreciation that occurred subsequently.

In Appleby, even though the purchaser was aware of the potential problem with her title prior to closing, the court found that the time of loss did not occur until the plaintiff had a final judicial determination that her property did not include a vehicular right-of-way. The language of the market value rider in Appleby appears to have been the same as that in Purcell, but in Appleby, unlike Purcell, the precise date deemed to be the “time of loss” made a significant difference in the amount the insured would recover. The court opted for the date on which litigation established the rights of the parties rather than the date on which it became that there was a claim adverse to the insured's claim.

Mis-indexed Mortgage Does Not Provide Constructive Notice

PHH Mortgage Corp. v. Peters

NYLJ 1/24/11

Supreme Court, N.Y. Cty.

(Madden, J.)

In an action to foreclose a mortgage, defendant fee owner and subsequent mortgagee moved for summary judgment dismissing the complaint against them, and also moved for summary judgment on their counterclaim for a declaration that plaintiff-mortgagee's mortgage is subject to and subordinate to the owner's deed and the subsequent mortgage. The court granted the summary judgment motion, concluding that because the original mortgage was misindexed, it did not provide constructive notice to subsequent purchasers and mortgagees.

In 2002, Peters gave a mortgage on his condominium unit in the principal amount of $299,915 to MERS as nominee for Merrill Lynch Credit. The mortgage was recorded, but mis-indexed under Block 836, Lot 2095 instead of the correct designation, Block 936, Lot 2095. In 2003, Peters sold the unit to Choy for $414,000. The purchaser was financed by two mortgages from Chase in the amounts of $322,700 and $50,800. The title search commissioned by Choy's lawyer did not disclose the mis-indexed mortgage. Choy's deed and the Chase mortgages were properly recorded on Aug. 11, 2003. Merrill Lynch Credit assigned the original mortgage to PHH on Nov. 4, 2009, and PHH brought this foreclosure action two days later. Subsequently, on Nov. 27, 2009, PHH recorded its assignment of mortgage under the proper block and lot number. Choy and Chase sought summary judgment, submitting affidavits that they had no actual knowledge of the Merrill Lynch Credit mortgage until they received notice of the PHH foreclosure action.

In awarding summary judgment to Choy and Chase, the court held that a misindexed mortgage does not provide constructive notice to subsequent purchasers. The court rejected PHH's argument that in light of New York City's ACRIS computerized recording system, a simple use of the “search by name” option would have revealed that Peters had mortgaged the unit to Merrill Lynch, noting that even if the search had been performed, the only mortgage listed would have had the incorrect block number. The court also rejected PHH's argument that discovery was necessary to explore the claims by Choy and Chase that they had no knowledge of the mortgage.

COMMENT

An improperly indexed mortgage is deemed outside the chain of title and will not provide constructive notice to subsequent mortgagees. In Coco v. Ranalletta, 305 A.D.2d 1082 (4th Dep't 2003), for example, the court held that a senior mortgage that was incorrectly indexed due to a misspelling of the mortgagor's name lost priority to a junior, correctly-indexed mortgage. Id. Because the misindexed senior mortgage fell outside of the chain of title, the subsequent mortgagee could not be charged with constructive notice of the superior lien. Id. Such a limitation on constructive notice is designed to protect purchasers from the “danger that a particular outstanding interest will be overlooked because it was recorded outside of the direct 'chain of title.'” Andy Assocs., Inc. v. Bankers Trust Co., 49 N.Y.2d 13, 24 (1979).

But now that computerized record systems allow title searchers quickly and easily to find even documents outside of the traditional “chain of title,” it is unclear whether constructive notice will remain limited to documents within that direct chain of title. Although it has not yet addressed the issue of computerized searches, the Court of Appeals has indicated that purchasers can be charged with constructive notice of documents outside of their direct chain of title where those purchasers have at their disposal a system that enables them “readily to find all conveyances ' which affect a particular parcel of land.” Andy Assocs., 49 N.Y.2d at 24 (holding that constructive notice extended to mortgage document outside subsequent mortgagee's direct chain of title where document was discoverable through “block and lot” search). Under such circumstances, the court noted, “there is no logical reason to afford potential purchasers additional protection by applying the time-honored [chain of title] rule.” Id. That holding suggests that purchasers can be charged with constructive notice of all instruments discoverable via computerized search ' even those outside the direct chain of title.

More recent cases, however, indicate that courts may be hesitant to extend constructive notice to those documents outside the chain of title that are discoverable only through computerized searches. See Coco, 305 A.D.2d at 1082 (holding that where mortgage was improperly indexed due to misspelling (“Ranaletta” instead of “Ranalletta”), mortgage failed to provide constructive notice, even though computerized record system allowed for “phonetic” searches that could have revealed mortgage); Big Fun, L.L.C. v. Gross, N.Y.L.J. 8/12/98, p. 23, col. 5, Sup. Ct., N.Y. Cty (holding that judgment docketed as lien under misspelled name did not provide constructive notice even though computerized search of records for alternate spellings may have been successful). Courts have cautioned that requiring additional computerized searches would introduce “uncertainty” regarding the types of searches that purchasers must perform before a record can be held to have been searched sufficiently. See Coco v. Ranalletta, 189 Misc. 2d 535, 537 (Sup. Ct. Monroe County 2001); Big Fun, N.Y.L.J. 8/12/98, p. 23, col. 5. Those cases, however, dealt only with a party's responsibility to search for name variations in cases of misspellings; whether courts will hold similarly in other contexts remains to be seen.

Dispute About Mortgagor's Rights Precludes Cancellation of Mortgagee's Notice of Pendency

Citimortgage, Inc. v. McNeil

NYLJ 2/8/11

Supreme Ct., Kings Cty.

(Hinds-Radix, J.)

In mortgagee's action to vacate an erroneously issued satisfaction of its mortgage, a non-party moved to cancel mortgagee's notice of pendency and discharge the mortgage or record on the ground that the mortgagor had no authority to execute the mortgage. The court denied the non-party's motion, holding that questions remained about mortgagor's right to the disputed property.

Dickens, the former owner of the subject property, died on Feb. 9, 2006. The following day, her granddaughter, McNeil, purporting to act as executor of Dickens' estate, executed a deed to herself as grantee. Several months later, she executed a mortgage in favor of Fremont to secure a $250,000 loan. The following year, she executed another mortgage, in favor of Citi's predecessor, to secure a $340,000 loan. The proceeds were used, in part, to satisfy the Fremont mortgage. In December 2007, Citi erroneously issued a satisfaction of the mortgage, which was recorded the same month. Then, in May 2008, Citi filed a notice of pendency and brought this action to vacate the satisfaction and restore its mortgage to its original position. Three months later, Dickens' sister, Alston, brought a separate action against McNeil to vacate the Feb. 10 deed McNeil had executed to herself. Alston contended that because no will had been probated, McNeil had not authority to execute the deed. Alston did not name Citi as a party to the action, even though Citi's notice of pendency had been filed. In that action, Supreme Court granted summary judgment to Alston and ordered the city register to cancel and discharge or record the Feb. 10, 2006 deed. Based on that judgment, Alston moved in this action to cancel Citi's notice of pendency and to discharge Citi's mortgage.

In denying Alston's motion, the court emphasized that in considering whether to cancel a notice of pendency under CPLR 6501, a court does not assess the likelihood of success on the merits. Here, because the relief sought by Citi ' cancellation of the satisfaction ' would affect title to the subject property, the notice of pendency was properly filed. The court then noted that none of the grounds for cancellation specified in CPLR 6514 were present in this case. The court then noted that Alston could not invoke its judgment nullifying the deed to McNeil as a basis for cancelling the notice because Alston had not made Citi a party to that proceeding. As a result, the determination in that proceeding could not, as a matter of due process, bind Citi. Finally, the court noted that despite the judgment nullifying the deed, McNeil might still have had a mortgagable interest in the property; even if she had no authority to execute the mortgage as executor, she might still have succeeded to the property as a beneficiary of Dickens' will, and in that event, title would have vested in her at the moment of Dickens' death, not at the time of probate. As a result, Alston was not entitled to cancellation of the notice of pendency or discharge of Citi's mortgage lien.

Statute of Limitations Does Not Bar Mortgagee's Claim

Wells Fargo Bank, N.A. v. Cohen

NYLJ 2/1/11

AppDiv, Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, mortgagee bank appealed from Supreme Court's denial of its summary judgment motion and grant of mortgagor's motion dismissing the complaint on statute of limitations grounds. The Appellate Division modified to reinstate the complaint and grant summary judgment to mortgagee with respect to all payments due after July 1, 2002 ' six years before mortgagee brought the foreclosure action.

Mortgagor first defaulted in payment on the mortgage in June 2000. Mortgagee did not bring the foreclosure action until June 2008. Supreme Court dismissed the complaint, concluding that the action was time-barred because more than six years had elapsed since the last payment was made and the mortgage was accelerated. Mortgagee appealed.

In reversing, the Appellate Division held that with a mortgage payable in installments, the mortgagee has a separate cause of action for each installment, and the statute of limitations begins to run on each installment when that installment becomes due. The court emphasized that neither the note nor the mortgage included a provision automatically accelerating the entire obligation upon a default in making one payment. As a result, when mortgagee brought the foreclosure action in June 2008, only payments due before July 1, 2002 had become time-barred. As to payments that became due after that date, mortgagee was entitled to summary judgment.

COMMENT

When a mortgage agreement includes a clause providing that, upon any default by the debtor, the mortgagee's right to payment is automatically accelerated and the entire amount of the mortgage debt becomes due, the statute of limitations on recovery of the entire debt runs from the moment the default occurs. See National Shawmut Bank v. Sherbrooke, 36 N.Y.S.2d 594 (court held that by the terms of the mortgage, acceleration was immediate upon default and the six-year statute of limitations began to run at that time).

Similarly, when the mortgage gives the mortgagee the option to accelerate mortgage payments rather than providing for automatic acceleration, the statute of limitations on the entire debt runs from the moment the mortgagee exercises its right to accelerate. See Federal National Mortgage v. Mebane, 208 A.D.2d 892, 894 (where the court held that upon exercise of an optional acceleration clause, the entire mortgage debt became due and the statute of limitations began to run).

In contrast, if the mortgage includes no acceleration clause or the mortgagee fails to exercise an optional acceleration clause, separate causes of action for each installment will accrue and the statute of limitations will begin to run on the date each installment becomes due. See Pagano v. Smith, 201 A.D.2d 632. (where the mortgage included an optional acceleration clause that mortgagee had not exercised, court held that foreclosure action was not time-barred as to those installments due within the six years before the action was commenced); see also Utica v. Knox, 71 A.D.2d 763 (where the mortgage did not contain an acceleration provision, court held that the entire mortgage debt did not become due at the time of default, but rather separate actions could be brought and the statute of limitations would begin to run as each installment became due).

When the mortgagee takes action having legal significance, such as the filing of a summons and complaint, the filing of a lis pendens, or a formal notice by the mortgagee, courts have held that mortgagee's action demonstrates an intent to exercise an optional acceleration clause. See Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472; 446 West 44th St. Inc. v. Riverland Holding Corp., 267 A.D. 135, 137. Conversely, action having no immediate legal significance, such as commencing a title search in preparation for a foreclosure action or refusing to accept delinquent payment while at the same time telling mortgagor to see his lawyer, have been found to be insufficient to constitute exercise of an option to accelerate a mortgage. See 446 West 44th St. Inc. v. Riverland Holding Corp., 267 A.D. 135, 137; Matusak v. Bakiorzynski, 128 Misc. 375, 219 N.Y.S. 29 .

Insured Entitled to Recover Diminution of Value on Date Litigation Established That She Had No Easement

Appleby v. Chicago Title Insurance Co.

NYLJ 1/18/11

p. 22., col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action on a title insurance policy, landowner appealed from Supreme Court's grant of title insurer's summary judgment motion declaring that title insurer's liability was limited to $59,031. The Appellate Division reversed, holding that the policy provisions entitled landowner to the diminution in the value of her property on the date that litigation established that she had no easement of access to a public road.

In 1997, when landowner became interested in purchasing the subject property, prior owner allegedly told her that the property was benefited by an easement that permitted vehicular access to the Albany Post Road. Before purchasing, landowner also became aware that the servient owner did not agree that the easement permitted vehicle traffic. Landowner then informed its title insurer of the problem, and purchased a title insurance policy that insured that the “outcome of … litigation shall be favorable to the insured and confirm a Right of Vehicular ingress and egress to the insured premises.” The policy also included a “market value rider” to the policy which insured landowner against loss or damage “not exceeding the market value of the premises at the time of loss … ” Landowner subsequently brought a proceeding seeking an injunction against interference with her easement, but it was judicially determined that her easement was limited to a pedestrian right-of-way. She then filed a claim against the title insurer. The latter asserted that landowner was entitled to $59,031, and Supreme Court awarded the insurer summary judgment limiting its liability to that amount. Landowner appealed.

In reversing, the Appellate Division relied on the “market value rider,” noting that the policy defined time of loss as “such date as the homeowner shall have actual knowledge of facts giving rise to a claim … ” Here, the court held that the date was March 23, 2006, the date on which the Court of Appeals denied leave to appeal in landowner's action for an injunction against interference with the easement. As a result, Chicago Title was liable for the diminution in landowner's market value “ from the date of her purchase of the premises until March 23, 2006, not exceeding the market value of the premises as of that latter date.”

COMMENT

In the absence of a market value rider, a purchaser with a claim for complete loss under a title insurance policy is entitled to collect the policy limit, regardless of the purchase price of the subject property. For example, in Rose Development Corp. v. Einhorn, 65 A.D.3d 1115, plaintiff, Rose, sought contribution and indemnification on behalf of its title insurance company from the group that had sold it a property that been improperly foreclosed. After a challenge and appeal from a third-party defendant, the court held that the insurance payout for which plaintiff sought contribution and indemnification was valid even though the payment of $275,000 (the policy limit) was almost double the $150,000 purchase price and less than the $350,000 market value of the property at the time of purchase.

Market value riders expand the protection offered to a purchaser of title insurance by giving the purchaser the option to make a claim either for the value of coverage under the traditional policy or for the market value of the subject property at the time of loss. “Time of loss” has traditionally been interpreted to mean the time when the purchaser becomes aware of a defect in the title. See, e.g., Purcell v. Commonwealth Land Title Ins. Co. 19 A.D.3d 469, where the court found that plaintiff Purcell, who had purchased a property at below market value in a foreclosure sale, was entitled to coverage through his insurance policy in the amount of the market value of the property on the fourth day after he closed on the property. The court found that this was the date that Purcell had “actual knowledge of facts giving rise to a claim” because it was the date on which he learned that the seller may have lost the ability to convey legal title to the land by filing bankruptcy just before the closing date. Id. at 470. It is unclear, however, whether the determination of the “time of loss” was a central question in this case; any additional market value that Purcell sought to protect had accrued immediately at the time of closing due to the nature of the foreclosure sale and was not due to appreciation that occurred subsequently.

In Appleby, even though the purchaser was aware of the potential problem with her title prior to closing, the court found that the time of loss did not occur until the plaintiff had a final judicial determination that her property did not include a vehicular right-of-way. The language of the market value rider in Appleby appears to have been the same as that in Purcell, but in Appleby, unlike Purcell, the precise date deemed to be the “time of loss” made a significant difference in the amount the insured would recover. The court opted for the date on which litigation established the rights of the parties rather than the date on which it became that there was a claim adverse to the insured's claim.