Real Property Law

Court of Appeals

(Opinion by Smith, J.)

In an action by purchaser of a leasehold interest seeking return of a $6 million deposit, purchaser appealed from the Appellate Division's award of summary judgment dismissing the complaint. The Court of Appeals affirmed, holding that purchaser took the risk that the City of New York might not permit the assignment.

In 1981, the city sold the disputed Lower East Side parcel to the sponsor of an urban renewal project for $475,000. The sponsor agreed that the area would be developed as a supermarket shopping center, and agreed to lease the property to Pathmark for a 25-year term. The agreement also provided that for the ensuing 25 years, the sponsor could lease to another tenant, or Pathmark could sublet, only upon obtaining prior written approval of the City of New York. The restriction was to expire in January 2009. In 2007, plaintiff in this action sought to develop the property for residential use and contracted to purchase both the fee interest in the property and Pathmark's leasehold interest. Purchaser and Pathmark entered into a leasehold assignment contract by the terms of which purchaser agreed to pay Pathmark $87 million for its leasehold interest, and paid a deposit of $6 million. When the real estate market fell, purchaser terminated the agreement before closing. In this action, purchaser sought return of its deposit, contending that Pathmark had breached the agreement because it was not entitled to assign the property. Pathmark counterclaimed for a declaratory judgment and damages. Supreme Court denied summary judgment motions by both parties, but a divided Appellate Division reversed, granting summary judgment to Pathmark.

In affirming, the Court of Appeals focused on a provision in the lease assignment contract which provided that Pathmark warranted that it was not prohibited from consummating the assignment by any agreement other than (a list of permitted exceptions). The 1981 agreement with the city was on the list of permitted exceptions. The Court of Appeals held that inclusion of the 1981 agreement as a permitted exception established that purchaser had accepted the risk that the city would prohibit Pathmark from consummating the assignment. As a result, Pathmark did not breach the agreement, and purchaser breached by failing to close on the agreement.

Mortgagee Not Entitled to Deficiency Liability

Pirrera v. FMO Associates II, LLC

NYLJ 11/21/11, p. 27, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, mortgagee appealed from Supreme Court's denial of their motion to amend the judgment of foreclosure and sale to add deficiency liability against three individual defendants. The Appellate Division affirmed, citing prejudice to the individual defendants.

FMO Associates executed a note and mortgage in the amount of $540,000 in connection with the subject commercial property. Three individual defendants individually guaranteed the note. When FMO defaulted on the note, mortgagees brought this action against both FMO and the individual defendants, seeking to foreclose the mortgage and seeking a deficiency judgment against both FMO and the individual defendants. When the judgment of foreclosure and sale was entered in August 2008, the judgment granted a right to a deficiency judgment only against FMO, but not against the individual defendants. The property was then sold, and after sale, mortgagee moved to amend the judgment to add deficiency liability against the individual defendants. Supreme Court denied the motion, and mortgagee appealed.

In affirming, the Appellate Division noted that when, due to an inadvertent omission, a judgment of foreclosure fails to provide for deficiency liability, the judgment may generally be amended to provide for deficiency liability. The court held, however, that a court may not amend the judgment when a defendant's substantive rights would be prejudiced. Here, the individual defendants did not attend the foreclosure sale and bid on the property, nor did they otherwise protect their rights, in apparent reliance on the absence of any provision in the judgment of foreclosure and sale indicating that mortgagees were seeking a deficiency judgment against them. The court held that defendants' reliance precluded amendment of the judgment of foreclosure and sale.

COMMENT

If a mortgagee wants to recover a deficiency after a foreclosure sale, RPAPL ' 1371 requires that the foreclosure complaint include a prayer for a deficiency judgment against the specific party from whom the deficiency is sought. In Barclays Bank of New York v. Strathmore Five Realty Co, 245 A.D.2d 406, no deficiency judgment was granted against a guarantor named as a party in the foreclosure action when the complaint sought a deficiency only against the borrower, not the guarantor. The court denied mortgagor's motion, made after the foreclosure sale, to amend the complaint to seek a deficiency judgment against the guarantor. The court reasoned that the guarantor correctly assumed the plaintiff had waived its right to seek a deficiency against him.

Courts generally permit a mortgagee to amend the initial foreclosure judgment to include a deficiency judgment against an omitted guarantor, so long as the omission was technical and the foreclosure sale has not yet taken place. In The Pines at Setauket v. Retirement Management Group Inc., 246 A.D.2d 528, the court granted leave to amend because the guarantors had been previously identified as parties to the deficiency action and had been properly served with all the pleadings and motions.

By contrast, once the foreclosure sale has been conducted, courts generally find prejudice and will not amend a judgment to include a deficiency judgment against an omitted guarantor even if the guarantor's omission was inadvertent. In FDIC v. Robin Construction Corp., 2 A.D.3d 395, the court declined to amend when the foreclosure complaint sought a deficiency judgment against the guarantors, but the foreclosure judgment did not impose deficiency liability. Unlike The Pines at Setauket, where the amendment was sought before the foreclosure sale, the FDIC plaintiffs sought amendment after the foreclosure sale had taken place. The court emphasized that the guarantors did not attend the sale in reliance on their omission from deficiency liability and thus any amendment would substantially prejudice the guarantors' rights.

Surviving Joint Tenant Not Obligated to Contribute to Expenses Paid By Deceased Joint Tenant

Trotta v. Ollivier

NYLJ 11/21/11, p. 20, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action by executor of deceased joint tenant against surviving joint tenant for reimbursement of purchase price and carrying charges, executor appealed from Supreme Court's dismissal of the complaint. The Appellate Division reversed to reinstate the complaint with respect to amounts paid by the executor after death, but not with respect to amounts paid by joint tenant before her death.

The two joint tenants bought the subject property, located in Pennsylvania, in 1992. The parties lived together as an unmarried couple, and took title as joint tenants with right of survivorship. Surviving joint tenant paid nothing toward the purchase price or carrying charges. Deceased joint tenant paid $90,000 toward the purchase price and $136,500 toward carrying charges. Deceased joint tenant died unexpectedly in 2008. Her executor made mortgage and other payments totaling $7,500 after her death. The executor then brought this action against the surviving joint tenant to recover one-half of the purchase price and carrying charges, and full reimbursement for the $7,500 paid after death. Supreme Court dismissed the complaint.

In reversing, the Appellate Division first agreed with Supreme Court that the executor had no claim for reimbursement of expenses paid during lifetime. The deceased joint tenant could have severed the joint tenancy, or could have sought partition, during her lifetime. In that event, surviving joint tenant would have become liable for contribution upon any partition of the property. But because deceased joint tenant did not sever and did not seek partition, the surviving joint tenant took full ownership of the property automatically upon death of the deceased joint tenant, without any obligation to reimburse the estate for pre-death expenses. The court did hold, however, that the estate is entitled to reimbursement for expenses paid by the estate after the deceased joint tenant's death. By that time, ownership had passed to the surviving joint tenant as a matter of law, and surviving joint tenant would e unjustly enriched if not required to reimburse the executor for expenses paid with respect to the property.

Mortgagee Cannot Prove Ownership of Note

Citimortgage, Inc. v. Stosel

NYLJ 11/21/11, p. 22, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's order awarding summary judgment to mortgagee. The Appellate Division reversed and dismissed the complaint for lack of standing.

When mortgagee brought this foreclosure action, mortgagor challenged mortgagee's standing. Although Supreme Court nevertheless awarded summary judgment to mortgagee, the Appellate Division held that when defendant in a foreclosure action places mortgagee's standing at issue, mortgagee must establish its standing by proving ownership of both the mortgage and the note. In this case, mortgagee failed to prove how and when it had become the owner of the note by delivery or valid assignment. As a result, mortgagor was entitled to summary judgment.

Purchaser Took Risk That City Would Not Approve
Assignment of Lease

CPS Operating Co., LLC v. Pathmark Stores, Inc.

NYLJ 11/16/11, p. 23, col. 1

Court of Appeals

(Opinion by Smith, J.)

In an action by purchaser of a leasehold interest seeking return of a $6 million deposit, purchaser appealed from the Appellate Division's award of summary judgment dismissing the complaint. The Court of Appeals affirmed, holding that purchaser took the risk that the City of New York might not permit the assignment.

In 1981, the city sold the disputed Lower East Side parcel to the sponsor of an urban renewal project for $475,000. The sponsor agreed that the area would be developed as a supermarket shopping center, and agreed to lease the property to Pathmark for a 25-year term. The agreement also provided that for the ensuing 25 years, the sponsor could lease to another tenant, or Pathmark could sublet, only upon obtaining prior written approval of the City of New York. The restriction was to expire in January 2009. In 2007, plaintiff in this action sought to develop the property for residential use and contracted to purchase both the fee interest in the property and Pathmark's leasehold interest. Purchaser and Pathmark entered into a leasehold assignment contract by the terms of which purchaser agreed to pay Pathmark $87 million for its leasehold interest, and paid a deposit of $6 million. When the real estate market fell, purchaser terminated the agreement before closing. In this action, purchaser sought return of its deposit, contending that Pathmark had breached the agreement because it was not entitled to assign the property. Pathmark counterclaimed for a declaratory judgment and damages. Supreme Court denied summary judgment motions by both parties, but a divided Appellate Division reversed, granting summary judgment to Pathmark.

In affirming, the Court of Appeals focused on a provision in the lease assignment contract which provided that Pathmark warranted that it was not prohibited from consummating the assignment by any agreement other than (a list of permitted exceptions). The 1981 agreement with the city was on the list of permitted exceptions. The Court of Appeals held that inclusion of the 1981 agreement as a permitted exception established that purchaser had accepted the risk that the city would prohibit Pathmark from consummating the assignment. As a result, Pathmark did not breach the agreement, and purchaser breached by failing to close on the agreement.

Mortgagee Not Entitled to Deficiency Liability

Pirrera v. FMO Associates II, LLC

NYLJ 11/21/11, p. 27, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, mortgagee appealed from Supreme Court's denial of their motion to amend the judgment of foreclosure and sale to add deficiency liability against three individual defendants. The Appellate Division affirmed, citing prejudice to the individual defendants.

FMO Associates executed a note and mortgage in the amount of $540,000 in connection with the subject commercial property. Three individual defendants individually guaranteed the note. When FMO defaulted on the note, mortgagees brought this action against both FMO and the individual defendants, seeking to foreclose the mortgage and seeking a deficiency judgment against both FMO and the individual defendants. When the judgment of foreclosure and sale was entered in August 2008, the judgment granted a right to a deficiency judgment only against FMO, but not against the individual defendants. The property was then sold, and after sale, mortgagee moved to amend the judgment to add deficiency liability against the individual defendants. Supreme Court denied the motion, and mortgagee appealed.

In affirming, the Appellate Division noted that when, due to an inadvertent omission, a judgment of foreclosure fails to provide for deficiency liability, the judgment may generally be amended to provide for deficiency liability. The court held, however, that a court may not amend the judgment when a defendant's substantive rights would be prejudiced. Here, the individual defendants did not attend the foreclosure sale and bid on the property, nor did they otherwise protect their rights, in apparent reliance on the absence of any provision in the judgment of foreclosure and sale indicating that mortgagees were seeking a deficiency judgment against them. The court held that defendants' reliance precluded amendment of the judgment of foreclosure and sale.

COMMENT

If a mortgagee wants to recover a deficiency after a foreclosure sale, RPAPL ' 1371 requires that the foreclosure complaint include a prayer for a deficiency judgment against the specific party from whom the deficiency is sought. In Barclays Bank of New York v. Strathmore Five Realty Co, 245 A.D.2d 406, no deficiency judgment was granted against a guarantor named as a party in the foreclosure action when the complaint sought a deficiency only against the borrower, not the guarantor. The court denied mortgagor's motion, made after the foreclosure sale, to amend the complaint to seek a deficiency judgment against the guarantor. The court reasoned that the guarantor correctly assumed the plaintiff had waived its right to seek a deficiency against him.

Courts generally permit a mortgagee to amend the initial foreclosure judgment to include a deficiency judgment against an omitted guarantor, so long as the omission was technical and the foreclosure sale has not yet taken place. In The Pines at Setauket v. Retirement Management Group Inc., 246 A.D.2d 528, the court granted leave to amend because the guarantors had been previously identified as parties to the deficiency action and had been properly served with all the pleadings and motions.

By contrast, once the foreclosure sale has been conducted, courts generally find prejudice and will not amend a judgment to include a deficiency judgment against an omitted guarantor even if the guarantor's omission was inadvertent. In FDIC v. Robin Construction Corp., 2 A.D.3d 395, the court declined to amend when the foreclosure complaint sought a deficiency judgment against the guarantors, but the foreclosure judgment did not impose deficiency liability. Unlike The Pines at Setauket, where the amendment was sought before the foreclosure sale, the FDIC plaintiffs sought amendment after the foreclosure sale had taken place. The court emphasized that the guarantors did not attend the sale in reliance on their omission from deficiency liability and thus any amendment would substantially prejudice the guarantors' rights.

Surviving Joint Tenant Not Obligated to Contribute to Expenses Paid By Deceased Joint Tenant

Trotta v. Ollivier

NYLJ 11/21/11, p. 20, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action by executor of deceased joint tenant against surviving joint tenant for reimbursement of purchase price and carrying charges, executor appealed from Supreme Court's dismissal of the complaint. The Appellate Division reversed to reinstate the complaint with respect to amounts paid by the executor after death, but not with respect to amounts paid by joint tenant before her death.

The two joint tenants bought the subject property, located in Pennsylvania, in 1992. The parties lived together as an unmarried couple, and took title as joint tenants with right of survivorship. Surviving joint tenant paid nothing toward the purchase price or carrying charges. Deceased joint tenant paid $90,000 toward the purchase price and $136,500 toward carrying charges. Deceased joint tenant died unexpectedly in 2008. Her executor made mortgage and other payments totaling $7,500 after her death. The executor then brought this action against the surviving joint tenant to recover one-half of the purchase price and carrying charges, and full reimbursement for the $7,500 paid after death. Supreme Court dismissed the complaint.

In reversing, the Appellate Division first agreed with Supreme Court that the executor had no claim for reimbursement of expenses paid during lifetime. The deceased joint tenant could have severed the joint tenancy, or could have sought partition, during her lifetime. In that event, surviving joint tenant would have become liable for contribution upon any partition of the property. But because deceased joint tenant did not sever and did not seek partition, the surviving joint tenant took full ownership of the property automatically upon death of the deceased joint tenant, without any obligation to reimburse the estate for pre-death expenses. The court did hold, however, that the estate is entitled to reimbursement for expenses paid by the estate after the deceased joint tenant's death. By that time, ownership had passed to the surviving joint tenant as a matter of law, and surviving joint tenant would e unjustly enriched if not required to reimburse the executor for expenses paid with respect to the property.

Mortgagee Cannot Prove Ownership of Note

Citimortgage, Inc. v. Stosel

NYLJ 11/21/11, p. 22, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's order awarding summary judgment to mortgagee. The Appellate Division reversed and dismissed the complaint for lack of standing.

When mortgagee brought this foreclosure action, mortgagor challenged mortgagee's standing. Although Supreme Court nevertheless awarded summary judgment to mortgagee, the Appellate Division held that when defendant in a foreclosure action places mortgagee's standing at issue, mortgagee must establish its standing by proving ownership of both the mortgage and the note. In this case, mortgagee failed to prove how and when it had become the owner of the note by delivery or valid assignment. As a result, mortgagor was entitled to summary judgment.