Real Property Law

Court of Appeals

(Smith, J.)

In buyers' action for breach of contracts to sell real property, seller appealed from a judgment in buyers' favor after the Appellate Division had affirmed Supreme Court's award of summary judgment to buyers. The court of appeals modified to deny summary judgment to both parties, holding that to prevail on its claim, the buyers would have to show that they were ready, willing, and able to close the transaction.

On March 12, 2003, seller contracted to sell three properties, each improved with a three-family house, to buyers. Seller agreed to deliver certificates of occupancy for the three properties, or appropriate sign-offs indicating that the certificates would be forthcoming. The contracts also included a mortgage contingency clause, and specified a closing date of July 1, 2003. For four years, however, the dwellings were not built and the mortgage commitments not obtained. In 2006, the sellers transferred the property to an affiliated corporation. In 2007, seller's lawyer wrote to buyers purporting to cancel the 2003 contracts because buyers had not obtained mortgage commitments. Buyers then brought this action for breach of contract, and both parties sought summary judgment. Supreme Court awarded buyers summary judgment on the issue of liability, and the Appellate Division affirmed, holding that when a seller anticipatorily breaches a sale contract, a buyer that brings an action for damages need not show that it was ready, willing and able to perform, although such a showing would be necessary if the buyer were to seek specific performance. The parties then stipulated to damages, and Supreme Court entered final judgment. The court of appeals then granted the seller leave to appeal, bringing up for review the earlier, non-final, Appellate Division order.

In modifying, the court of appeals held that a non-repudiating buyer must demonstrate that it is ready, willing, and able to perform the contract in order to recover damages. The court emphasized that if the buyer were not ready, willing, and able to perform, the seller's breach would not have caused any damages. The court further held that the buyer, who has better information about its own intentions and resources, should have the burden of proving its readiness, willingness, and ability to perform. Because the buyer had not established that it was ready, willing, and able to perform, the buyer was not entitled to summary judgment. The court also noted that questions of fact remained about whether the seller's transfer to an affiliated entity constituted repudiation of the contract, and whether, if the buyer's failure to obtain a mortgage contingency was caused by seller's non-performance of its obligations.

COMMENT

Pesa's holding ' that a buyer seeking damages for anticipatory breach must show readiness, willingness, and ability to perform ' resolved a conflict among the Departments. All Departments had agreed that a non-repudiating buyer must prove readiness, willingness, and ability to perform in order to recover in an action seeking specific performance against a repudiating seller. The Third Department so held in Madison Invest., Inc. v. Cohoes Assoc., 176 A.D.2d 1021, where plaintiff contracted to purchase from defendants commercial real property. When defendants anticipatorily breached, the court denied plaintiff's claims for both specific performance and damages because plaintiff could not show financial capacity to perform. Similarly, the Fourth Department affirmed summary judgment in the defendant's favor on claims for specific performance and damages in EC, L.L.C. v. Eaglecrest Manufactured Home Park, Inc., 275 A.D.2d 898, noting that the plaintiff failed to raise a triable issue as to its readiness.

The Second Department, though, had held that that non-repudiating purchasers must show their readiness, willingness, and ability to perform in actions seeking specific performance, but not in actions seeking damages. See, e.g., Karo v. Paine, 55 A.D.3d 679, rejecting the defendant's argument that plaintiff must establish willingness, readiness and ability in order to recover damages and noting a distinction between actions for damages and specific performance.

Whenever a non-repudiating party's willingness, readiness, and ability to perform is at issue, the non-repudiating party bears the burden of proof. All of the previously cited cases ' in each department ' refer to the plaintiff's duty to “prove” or “show” readiness, willingness, and ability. See also 28 Props., Inc. v. Akleh Realty Corp., 22 A.D.3d 432 (First Department affirms the trial court's dismissal of plaintiff's action for failure to establish financial capacity to perform).

As authority for the proposition that a buyer must establish readiness, willingness, and ability to perform in an action against a repudiating seller, the court of appeals in Pesa cited language from an 1879 case, Bigler v. Morgan, 77 N.Y. 312. There, plaintiff and defendant agreed to exchange interests in properties. The executed agreement stipulated that the property conveyed by defendant was free of any encumbrances except for a certain mortgage. After execution of the agreement, plaintiff discovered another encumbrance not related to the mortgage. When plaintiff sued for damages, defendant objected, asserting that plaintiff was not ready and willing to perform. The court found that plaintiff was ready and willing to perform, and thus affirmed a judgment for damages in the plaintiff's favor. In the course of its opinion, however, the court indicated, in dictum, that the non-repudiating party must establish that “he was ready and willing to deliver such a deed as the contract called for” in order to recover damages. Perhaps because the language was dictum, until Pesa, Bigler had not been cited by the Court of Appeals since 1929, and has not been cited by any Appellate Division since 1935.

Malpractice Action Against Zoning Consultant Should Proceed to Trial

Assouline Ritz 1 LLC v. Edward I. Mills & Associates, PC

NYLJ 1/17/12, p. 19, col. 1

AppDiv, First Dept.

(memorandum opinion)

In purchaser's action for malpractice by an architectural firm, the firm appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, rejecting the firm's argument that purchaser's failure to sell the property immediately constituted a failure to mitigate damages, barring any malpractice claim.

In August 2004, purchaser contracted to purchase a five-story building for $5 million, with the intention of doing a gut renovation and adding six stories to the building. Before entering into the contract, purchaser retained the firm as a zoning consultant, and the firm advised purchaser that the zoning resolution permitted adding six stories to the building. After closing, the Department of Buildings advised purchaser that the zoning resolution did not permit adding six stories to the existing building (although the resolution did permit construction of a new 11-story building). After purchasers were unsuccessful in purchasing the air rights that would have permitted them to pursue their initial plan, they decided instead to demolish the building and redevelop with a new building. They then brought this malpractice action. The firm moved for summary judgment, contending that purchaser's failure to sell the property after discovering the firm's error constituted a failure to mitigate damages and precluded recovery. Supreme Court denied the motion, and the firm appealed.

In affirming, the court held that failure to sell did not bar recovery, but operated instead to reduce the amount purchaser would be entitled to recover. The court indicated that at trial, purchaser would bear the burden of proving the costs they incurred in purchasing and owning the property until they learned of the error and had sufficient time to resell the property, and the firm would have the burden of proving how much a resale would have brought after the zoning problem was revealed. Purchaser would be entitled to recover the difference between those amounts, whether or not it actually sold the property. The court, however, rejected purchaser's argument that it should also be entitled to purchaser's expenditures in pursuing its alternative development plan ' amounting to a total of more than $14 million in damages ' concluding that those the firm's malpractice was not the proximate cause of those damages.

COMMENT

When a purchaser establishes that it entered into a purchase agreement after obtaining negligent advice from a professional, courts generally hold that the professional malpractice was a proximate cause of the losses purchaser suffered by entering into the contract. For example, in Barnett v. Schwartz, 47 A.D.3d 197, the court upheld a jury verdict determining that lawyer malpractice proximately caused losses resulting from the purchase of property plagued by environmental violations that made the property wholly unsuitable for its intended purpose. The lawyers, who advised their clients to enter into the contract without fully investigating the environmental violations, unsuccessfully argued that because purchasers signed an “as is” purchase agreement and then did not sell immediately after discovery of the environmental violations, purchasers' business decisions, and not the lawyers' negligent advice, were the proximate cause of purchasers' losses. The court held that purchasers had demonstrated that but for the negligent advice, they would neither have purchased nor made additional investments in a property wholly unusable for its intended purpose.

Moreover, the lawyer cannot escape liability simply by arguing that the lawyer was not involved in negotiations for the property. In Claude v. Elgammal, 30 Misc. 3d 1210(A) the court denied the lawyer's summary judgment motion in a malpractice action brought by a purchaser who paid well in excess of the property's fair market value based on misrepresentations made by parties other than the lawyer. Although the lawyer only represented purchaser during the closing, and not the negotiating of the purchase agreement, the court noted that the lawyer had not established that purchaser would still have purchased the property if the lawyer had advised purchaser as to his rights and any irregularities with the agreement.

However, a court may award summary judgment to a lawyer who can show that the plaintiff-purchaser bought with full awareness of the risks associated with the purchase of the property. For example, in Merz v. Seaman, 265 A.D.2d 385, the court held that where plaintiff was a professional in the industry (he was an experienced banker), the lawyers' negligent legal and accounting advice was not the proximate cause of damages from purchaser's failed real estate investment.

Though the cases addressing awarded damages are few, it seems that ' as in Assouline ' courts are unwilling to award lost profits, preferring to award out-of-pocket costs or losses resulting from the difference between the property's expected value and actual resell value. For example, in Plymouth Organization, Inc. v. Silverman, Collura & Chernis, P.C., 21 A.D.3d 464, where an investment offering to finance an acquisition of commercial property was cancelled due to defendant attorneys' negligent advice, the court refused to award damages for lost investment opportunities. In Barnett, the court awarded only rent paid, cost of renovations of property, legal fees, and prejudgment interest. In Canavan v. Steenburg 170 A.D.2d 858 the court affirmed a judgment for plaintiff purchaser of the difference between the price at which plaintiff had originally contracted to resell the purchased property and the lower price at which the plaintiff was finally able to resell the property after the purchaser brought the property into compliance with local regulations the attorney had negligently failed to uncover.

Finally, as the court held in Assouline, failure to sell the property upon discovery of the professional's negligence does not bar recovery of damages. For example, in Barnett, the court rejected the defendant lawyers' argument that failure to sell promptly after discovery of the property's environmental violations offset defendants' liability.

Forged Deed Confers No Rights on Subsequent Transferee

ABM Amro Mortgage Group v. Kayann Stephens

NYLJ 1/30/12, p. 23, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to establish title pursuant to article 15 of the Real Property Actions and Proceedings Law, plaintiff appealed from Supreme Court denied its summary judgment motion. The Appellate Division reversed and granted summary judgment, holding that a certificate of acknowledgment attached to a deed created a presumption of validity that could only be rebutted by evidence showing that the deed was not duly executed.

All parties to the action trace title to a common grantor, Sally Mandeville, who moved from Brooklyn to South Carolina in 2002, when she was 77 years old. Defendants' chain (“the forged chain”) started with a power of attorney, allegedly executed by Mandeville, acknowledged by a notary, and recorded in the City Register's office on Aug. 29, 2005, giving Brown the power to sell the property on Mandeville's behalf. On the same date, Brown used the power of attorney to execute a deed on Mandeville's behalf to Westport. The forged chain continued with recorded deeds to Hometech, and then to Stephens by a deed recorded on July 24, 2006. Stephens executed a mortgage to Mortgage Lender's Network. Plaintiff traces its title to a power of attorney Mandeville gave to Mitchell in September 2003. The power of attorney was acknowledged by a notary, and Mitchell then executed a deed to Sanchez, who subsequently conveyed to Allam, who executed a mortgage to plaintiff ABN. All three instruments were dated Nov. 19, 2003. None of the deeds or mortgages in plaintiff's chain of title has been recorded.

In this action, plaintiff submitted the affidavit of the notary who had acknowledged the power of attorney Mandeville gave to Brown. The notary stated that the Mandeville whose signature she acknowledged was in her 40s. Defendants claiming under the forged chain did not challenge the notary's assertion, and did not submit evidence to undermine the validity of any of the deeds in plaintiff's chain of title, but nevertheless persuaded Supreme Court to deny plaintiff's summary judgment motion by contending that plaintiff had failed to prove the validity of its own title. Plaintiff appealed.

In reversing, the Appellate Division started by noting that when a power of attorney is forged, any document executed under the authority of that power of attorney is void, and subsequent bona fide purchasers for value take nothing. Here, the court concluded that defendants had raised no triable issue of fact disputing plaintiff's evidence that Brown's power of attorney was forged. As a result, the deeds in the forged chain were all void. The court then held that because the deeds in plaintiff's own chain were acknowledged, they were clothed with a presumption of validity even though they were not recorded. Because defendants did not contest the validity of any of the instruments, plaintiffs were entitled to summary judgment.

First Mortgagee's Lien Enjoys Priority over Obligation Created in Earlier Declaration of
Covenants

Valley National Bank v. Penna

NYLJ 1/30/12, p. 26, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, a homeowners association appealed from Supreme Court's grant of summary judgment to mortgagee bank. The Appellate Division affirmed, concluding that the association's declaration did not create a lien superior to that of the mortgagee bank.

Mortgagee bank brought the action to foreclose two mortgages on residential real property. In the complaint, mortgagee sought to extinguish any claim by the board of the homeowners association for unpaid assessments with respect to the property. The association contended that its claim enjoyed priority because the declaration of covenants, which provided for a “continuing lien” on the property for unpaid assessments, had been recorded before the bank extended its first mortgage loan, and before the bank recorded the mortgage. Supreme Court awarded summary judgment to the bank, and the association appealed.

In affirming, the Appellate Division held that the declaration did not purport to create an actual lien, but merely a potential lien for unpaid assessments. The declaration did not, therefore, give actual or constructive notice of a concrete claim, so that Supreme Court properly awarded summary judgment to the mortgagee bank, whose mortgage enjoyed priority over the association's claim.

Parties Contracted Around Prevention Doctrine

Thor Properties, LLC v. The Chetrit Group, LLC

NYLJ 1/17/12, p. 19, col. 1

AppDiv, First Dept.

(memorandum opinion)

In an action for breach of contract to buy shares in an LLC formed to acquire property, seller of the shares appealed from Supreme Court's award of summary judgment to purchaser. The Appellate Division affirmed, holding that the parties had contracted around the prevention doctrine.

Seller and purchaser jointly formed Komar to acquire real property. Komar successfully bid for the subject property, but the relationship between seller and purchaser soured, and they agreed for purchaser to acquire all of the shares in Komar in return for immediate reimbursement of the money seller had paid toward the deposit, plus $12,500,000. The agreement provided that repayment of the deposit would be non-refundable in any and all circumstances, and that payment of $6,250,000, which was to be made immediately upon execution of the agreement, would be nonrefundable “except in the event title fails to close for any reason other than Komar's default.” The final payment of $6,250,000 was to be made upon closing or upon purchaser's assignment of its interest to an unrelated party. The deposit and the first $6,250,000 payment were made, but Komar failed to close on the subject property, and, as a result, purchaser never made the third payment. Seller then brought this action seeking that third payment. Supreme Court awarded summary judgment to purchaser.

In affirming, the Appellate Division rejected seller's argument that the prevention doctrine precluded purchaser from relying on its own willful breach of the contract to purchase the land as an excuse for not making the third payment to seller. The court acknowledged the doctrine, which generally prevents a party from relying on non-performance of a condition as an excuse for avoiding payment when the non-performance was caused by the party seeking to avoid payment, but held that the doctrine applies only when consistent with the intent of the parties. Here, because the settlement contract's language distinguished between the second and third payment, and explicitly made the second payment nonrefundable “except in the event title fails to close for any reason other than Komar's default,” the absence of similar language with respect to the third payment generated an inference that purchaser would not be liable to make the payment unless title actually closed.

Judgment Creditor's Lis Pendens Provides Priority over Subsequent Mortgage

Perpignan v. Persaud

NYLJ 1/17/12, p. 27, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action for a determination of claims to real property pursuant to RPAPL article 15, mortgagees appealed from Supreme Court's grant of a preliminary injunction to mortgagor's judgment creditors. The Appellate Division affirmed, holding that the judgment creditors had demonstrated a likelihood of success on the merits.

Mortgagor gave a mortgage to WSMB in 2004. Before that time, current judgment creditor had filed a lis pendens in connection with its action for specific performance of a contract to sell the subject property. In April 2008, the property was conveyed to judgment creditor pursuant to a court order in the action for specific performance. That deed was recorded in May 2008. In July 2008, mortgagees, who had acquired the WSMB mortgage, purchased the property in connection with a foreclosure action, and then recorded the deed in October 2008. Judgment creditors then brought this action for a determination of claims, and sought a preliminary injunction restraining mortgagees from transferring or encumbering the property. Supreme Court granted the preliminary injunction.

In affirming, the Appellate Division started by noting because the lis pendens was filed before WSMB acquired a mortgage, the evidence appeared to show that WSMB was not a bona fide encumbrancer of the property. The court then suggested that the evidence tended to show that the current mortgagees, who subsequently acquired a deed, were not bona fide purchasers of the property. Finally, the court concluded that judgment creditor had demonstrated the she would suffer irreparable harm in the absence of a preliminary injunction, and that a balance of the equities supported granting the injunction.

Obtaining Damages from Breaching Seller

Pesa v. Yoma Development Group, Inc.

NYLJ 2/10/12, p. 25, col. 5

Court of Appeals

(Smith, J.)

In buyers' action for breach of contracts to sell real property, seller appealed from a judgment in buyers' favor after the Appellate Division had affirmed Supreme Court's award of summary judgment to buyers. The court of appeals modified to deny summary judgment to both parties, holding that to prevail on its claim, the buyers would have to show that they were ready, willing, and able to close the transaction.

On March 12, 2003, seller contracted to sell three properties, each improved with a three-family house, to buyers. Seller agreed to deliver certificates of occupancy for the three properties, or appropriate sign-offs indicating that the certificates would be forthcoming. The contracts also included a mortgage contingency clause, and specified a closing date of July 1, 2003. For four years, however, the dwellings were not built and the mortgage commitments not obtained. In 2006, the sellers transferred the property to an affiliated corporation. In 2007, seller's lawyer wrote to buyers purporting to cancel the 2003 contracts because buyers had not obtained mortgage commitments. Buyers then brought this action for breach of contract, and both parties sought summary judgment. Supreme Court awarded buyers summary judgment on the issue of liability, and the Appellate Division affirmed, holding that when a seller anticipatorily breaches a sale contract, a buyer that brings an action for damages need not show that it was ready, willing and able to perform, although such a showing would be necessary if the buyer were to seek specific performance. The parties then stipulated to damages, and Supreme Court entered final judgment. The court of appeals then granted the seller leave to appeal, bringing up for review the earlier, non-final, Appellate Division order.

In modifying, the court of appeals held that a non-repudiating buyer must demonstrate that it is ready, willing, and able to perform the contract in order to recover damages. The court emphasized that if the buyer were not ready, willing, and able to perform, the seller's breach would not have caused any damages. The court further held that the buyer, who has better information about its own intentions and resources, should have the burden of proving its readiness, willingness, and ability to perform. Because the buyer had not established that it was ready, willing, and able to perform, the buyer was not entitled to summary judgment. The court also noted that questions of fact remained about whether the seller's transfer to an affiliated entity constituted repudiation of the contract, and whether, if the buyer's failure to obtain a mortgage contingency was caused by seller's non-performance of its obligations.

COMMENT

Pesa's holding ' that a buyer seeking damages for anticipatory breach must show readiness, willingness, and ability to perform ' resolved a conflict among the Departments. All Departments had agreed that a non-repudiating buyer must prove readiness, willingness, and ability to perform in order to recover in an action seeking specific performance against a repudiating seller. The Third Department so held in Madison Invest., Inc. v. Cohoes Assoc., 176 A.D.2d 1021, where plaintiff contracted to purchase from defendants commercial real property. When defendants anticipatorily breached, the court denied plaintiff's claims for both specific performance and damages because plaintiff could not show financial capacity to perform. Similarly, the Fourth Department affirmed summary judgment in the defendant's favor on claims for specific performance and damages in EC, L.L.C. v. Eaglecrest Manufactured Home Park, Inc., 2 75 A.D.2d 898, noting that the plaintiff failed to raise a triable issue as to its readiness.

The Second Department, though, had held that that non-repudiating purchasers must show their readiness, willingness, and ability to perform in actions seeking specific performance, but not in actions seeking damages. See, e.g., Karo v. Paine, 55 A.D.3d 679, rejecting the defendant's argument that plaintiff must establish willingness, readiness and ability in order to recover damages and noting a distinction between actions for damages and specific performance.

Whenever a non-repudiating party's willingness, readiness, and ability to perform is at issue, the non-repudiating party bears the burden of proof. All of the previously cited cases ' in each department ' refer to the plaintiff's duty to “prove” or “show” readiness, willingness, and ability. See also 28 Props., Inc. v. Akleh Realty Corp., 22 A.D.3d 432 (First Department affirms the trial court's dismissal of plaintiff's action for failure to establish financial capacity to perform).

As authority for the proposition that a buyer must establish readiness, willingness, and ability to perform in an action against a repudiating seller, the court of appeals in Pesa cited language from an 1879 case, Bigler v. Morgan, 77 N.Y. 312. There, plaintiff and defendant agreed to exchange interests in properties. The executed agreement stipulated that the property conveyed by defendant was free of any encumbrances except for a certain mortgage. After execution of the agreement, plaintiff discovered another encumbrance not related to the mortgage. When plaintiff sued for damages, defendant objected, asserting that plaintiff was not ready and willing to perform. The court found that plaintiff was ready and willing to perform, and thus affirmed a judgment for damages in the plaintiff's favor. In the course of its opinion, however, the court indicated, in dictum, that the non-repudiating party must establish that “he was ready and willing to deliver such a deed as the contract called for” in order to recover damages. Perhaps because the language was dictum, until Pesa, Bigler had not been cited by the Court of Appeals since 1929, and has not been cited by any Appellate Division since 1935.

Malpractice Action Against Zoning Consultant Should Proceed to Trial

Assouline Ritz 1 LLC v. Edward I. Mills & Associates, PC

NYLJ 1/17/12, p. 19, col. 1

AppDiv, First Dept.

(memorandum opinion)

In purchaser's action for malpractice by an architectural firm, the firm appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, rejecting the firm's argument that purchaser's failure to sell the property immediately constituted a failure to mitigate damages, barring any malpractice claim.

In August 2004, purchaser contracted to purchase a five-story building for $5 million, with the intention of doing a gut renovation and adding six stories to the building. Before entering into the contract, purchaser retained the firm as a zoning consultant, and the firm advised purchaser that the zoning resolution permitted adding six stories to the building. After closing, the Department of Buildings advised purchaser that the zoning resolution did not permit adding six stories to the existing building (although the resolution did permit construction of a new 11-story building). After purchasers were unsuccessful in purchasing the air rights that would have permitted them to pursue their initial plan, they decided instead to demolish the building and redevelop with a new building. They then brought this malpractice action. The firm moved for summary judgment, contending that purchaser's failure to sell the property after discovering the firm's error constituted a failure to mitigate damages and precluded recovery. Supreme Court denied the motion, and the firm appealed.

In affirming, the court held that failure to sell did not bar recovery, but operated instead to reduce the amount purchaser would be entitled to recover. The court indicated that at trial, purchaser would bear the burden of proving the costs they incurred in purchasing and owning the property until they learned of the error and had sufficient time to resell the property, and the firm would have the burden of proving how much a resale would have brought after the zoning problem was revealed. Purchaser would be entitled to recover the difference between those amounts, whether or not it actually sold the property. The court, however, rejected purchaser's argument that it should also be entitled to purchaser's expenditures in pursuing its alternative development plan ' amounting to a total of more than $14 million in damages ' concluding that those the firm's malpractice was not the proximate cause of those damages.

COMMENT

When a purchaser establishes that it entered into a purchase agreement after obtaining negligent advice from a professional, courts generally hold that the professional malpractice was a proximate cause of the losses purchaser suffered by entering into the contract. For example, in Barnett v. Schwartz, 47 A.D.3d 197, the court upheld a jury verdict determining that lawyer malpractice proximately caused losses resulting from the purchase of property plagued by environmental violations that made the property wholly unsuitable for its intended purpose. The lawyers, who advised their clients to enter into the contract without fully investigating the environmental violations, unsuccessfully argued that because purchasers signed an “as is” purchase agreement and then did not sell immediately after discovery of the environmental violations, purchasers' business decisions, and not the lawyers' negligent advice, were the proximate cause of purchasers' losses. The court held that purchasers had demonstrated that but for the negligent advice, they would neither have purchased nor made additional investments in a property wholly unusable for its intended purpose.

Moreover, the lawyer cannot escape liability simply by arguing that the lawyer was not involved in negotiations for the property. In Claude v. Elgammal, 30 Misc. 3d 1210(A) the court denied the lawyer's summary judgment motion in a malpractice action brought by a purchaser who paid well in excess of the property's fair market value based on misrepresentations made by parties other than the lawyer. Although the lawyer only represented purchaser during the closing, and not the negotiating of the purchase agreement, the court noted that the lawyer had not established that purchaser would still have purchased the property if the lawyer had advised purchaser as to his rights and any irregularities with the agreement.

However, a court may award summary judgment to a lawyer who can show that the plaintiff-purchaser bought with full awareness of the risks associated with the purchase of the property. For example, in Merz v. Seaman, 265 A.D.2d 385, the court held that where plaintiff was a professional in the industry (he was an experienced banker), the lawyers' negligent legal and accounting advice was not the proximate cause of damages from purchaser's failed real estate investment.

Though the cases addressing awarded damages are few, it seems that ' as in Assouline ' courts are unwilling to award lost profits, preferring to award out-of-pocket costs or losses resulting from the difference between the property's expected value and actual resell value. For example, in Plymouth Organization, Inc. v. Silverman, Collura & Chernis, P.C., 21 A.D.3d 464, where an investment offering to finance an acquisition of commercial property was cancelled due to defendant attorneys' negligent advice, the court refused to award damages for lost investment opportunities. In Barnett, the court awarded only rent paid, cost of renovations of property, legal fees, and prejudgment interest. In Canavan v. Steenburg 170 A.D.2d 858 the court affirmed a judgment for plaintiff purchaser of the difference between the price at which plaintiff had originally contracted to resell the purchased property and the lower price at which the plaintiff was finally able to resell the property after the purchaser brought the property into compliance with local regulations the attorney had negligently failed to uncover.

Finally, as the court held in Assouline, failure to sell the property upon discovery of the professional's negligence does not bar recovery of damages. For example, in Barnett, the court rejected the defendant lawyers' argument that failure to sell promptly after discovery of the property's environmental violations offset defendants' liability.

Forged Deed Confers No Rights on Subsequent Transferee

ABM Amro Mortgage Group v. Kayann Stephens

NYLJ 1/30/12, p. 23, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to establish title pursuant to article 15 of the Real Property Actions and Proceedings Law, plaintiff appealed from Supreme Court denied its summary judgment motion. The Appellate Division reversed and granted summary judgment, holding that a certificate of acknowledgment attached to a deed created a presumption of validity that could only be rebutted by evidence showing that the deed was not duly executed.

All parties to the action trace title to a common grantor, Sally Mandeville, who moved from Brooklyn to South Carolina in 2002, when she was 77 years old. Defendants' chain (“the forged chain”) started with a power of attorney, allegedly executed by Mandeville, acknowledged by a notary, and recorded in the City Register's office on Aug. 29, 2005, giving Brown the power to sell the property on Mandeville's behalf. On the same date, Brown used the power of attorney to execute a deed on Mandeville's behalf to Westport. The forged chain continued with recorded deeds to Hometech, and then to Stephens by a deed recorded on July 24, 2006. Stephens executed a mortgage to Mortgage Lender's Network. Plaintiff traces its title to a power of attorney Mandeville gave to Mitchell in September 2003. The power of attorney was acknowledged by a notary, and Mitchell then executed a deed to Sanchez, who subsequently conveyed to Allam, who executed a mortgage to plaintiff ABN. All three instruments were dated Nov. 19, 2003. None of the deeds or mortgages in plaintiff's chain of title has been recorded.

In this action, plaintiff submitted the affidavit of the notary who had acknowledged the power of attorney Mandeville gave to Brown. The notary stated that the Mandeville whose signature she acknowledged was in her 40s. Defendants claiming under the forged chain did not challenge the notary's assertion, and did not submit evidence to undermine the validity of any of the deeds in plaintiff's chain of title, but nevertheless persuaded Supreme Court to deny plaintiff's summary judgment motion by contending that plaintiff had failed to prove the validity of its own title. Plaintiff appealed.

In reversing, the Appellate Division started by noting that when a power of attorney is forged, any document executed under the authority of that power of attorney is void, and subsequent bona fide purchasers for value take nothing. Here, the court concluded that defendants had raised no triable issue of fact disputing plaintiff's evidence that Brown's power of attorney was forged. As a result, the deeds in the forged chain were all void. The court then held that because the deeds in plaintiff's own chain were acknowledged, they were clothed with a presumption of validity even though they were not recorded. Because defendants did not contest the validity of any of the instruments, plaintiffs were entitled to summary judgment.

First Mortgagee's Lien Enjoys Priority over Obligation Created in Earlier Declaration of
Covenants

Valley National Bank v. Penna

NYLJ 1/30/12, p. 26, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In a foreclosure action, a homeowners association appealed from Supreme Court's grant of summary judgment to mortgagee bank. The Appellate Division affirmed, concluding that the association's declaration did not create a lien superior to that of the mortgagee bank.

Mortgagee bank brought the action to foreclose two mortgages on residential real property. In the complaint, mortgagee sought to extinguish any claim by the board of the homeowners association for unpaid assessments with respect to the property. The association contended that its claim enjoyed priority because the declaration of covenants, which provided for a “continuing lien” on the property for unpaid assessments, had been recorded before the bank extended its first mortgage loan, and before the bank recorded the mortgage. Supreme Court awarded summary judgment to the bank, and the association appealed.

In affirming, the Appellate Division held that the declaration did not purport to create an actual lien, but merely a potential lien for unpaid assessments. The declaration did not, therefore, give actual or constructive notice of a concrete claim, so that Supreme Court properly awarded summary judgment to the mortgagee bank, whose mortgage enjoyed priority over the association's claim.

Parties Contracted Around Prevention Doctrine

Thor Properties, LLC v. The Chetrit Group, LLC

NYLJ 1/17/12, p. 19, col. 1

AppDiv, First Dept.

(memorandum opinion)

In an action for breach of contract to buy shares in an LLC formed to acquire property, seller of the shares appealed from Supreme Court's award of summary judgment to purchaser. The Appellate Division affirmed, holding that the parties had contracted around the prevention doctrine.

Seller and purchaser jointly formed Komar to acquire real property. Komar successfully bid for the subject property, but the relationship between seller and purchaser soured, and they agreed for purchaser to acquire all of the shares in Komar in return for immediate reimbursement of the money seller had paid toward the deposit, plus $12,500,000. The agreement provided that repayment of the deposit would be non-refundable in any and all circumstances, and that payment of $6,250,000, which was to be made immediately upon execution of the agreement, would be nonrefundable “except in the event title fails to close for any reason other than Komar's default.” The final payment of $6,250,000 was to be made upon closing or upon purchaser's assignment of its interest to an unrelated party. The deposit and the first $6,250,000 payment were made, but Komar failed to close on the subject property, and, as a result, purchaser never made the third payment. Seller then brought this action seeking that third payment. Supreme Court awarded summary judgment to purchaser.

In affirming, the Appellate Division rejected seller's argument that the prevention doctrine precluded purchaser from relying on its own willful breach of the contract to purchase the land as an excuse for not making the third payment to seller. The court acknowledged the doctrine, which generally prevents a party from relying on non-performance of a condition as an excuse for avoiding payment when the non-performance was caused by the party seeking to avoid payment, but held that the doctrine applies only when consistent with the intent of the parties. Here, because the settlement contract's language distinguished between the second and third payment, and explicitly made the second payment nonrefundable “except in the event title fails to close for any reason other than Komar's default,” the absence of similar language with respect to the third payment generated an inference that purchaser would not be liable to make the payment unless title actually closed.

Judgment Creditor's Lis Pendens Provides Priority over Subsequent Mortgage

Perpignan v. Persaud

NYLJ 1/17/12, p. 27, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action for a determination of claims to real property pursuant to RPAPL article 15, mortgagees appealed from Supreme Court's grant of a preliminary injunction to mortgagor's judgment creditors. The Appellate Division affirmed, holding that the judgment creditors had demonstrated a likelihood of success on the merits.

Mortgagor gave a mortgage to WSMB in 2004. Before that time, current judgment creditor had filed a lis pendens in connection with its action for specific performance of a contract to sell the subject property. In April 2008, the property was conveyed to judgment creditor pursuant to a court order in the action for specific performance. That deed was recorded in May 2008. In July 2008, mortgagees, who had acquired the WSMB mortgage, purchased the property in connection with a foreclosure action, and then recorded the deed in October 2008. Judgment creditors then brought this action for a determination of claims, and sought a preliminary injunction restraining mortgagees from transferring or encumbering the property. Supreme Court granted the preliminary injunction.

In affirming, the Appellate Division started by noting because the lis pendens was filed before WSMB acquired a mortgage, the evidence appeared to show that WSMB was not a bona fide encumbrancer of the property. The court then suggested that the evidence tended to show that the current mortgagees, who subsequently acquired a deed, were not bona fide purchasers of the property. Finally, the court concluded that judgment creditor had demonstrated the she would suffer irreparable harm in the absence of a preliminary injunction, and that a balance of the equities supported granting the injunction.