Real Property Law

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a senior mortgage, a bank holding a junior mortgage appealed from Supreme Court's grant of summary judgment to the senior mortgagee. The Appellate Division reversed, holding that the bank was entitled to invoke the doctrine of equitable subrogation even though the bank had constructive knowledge of the senior mortgage.

The bank lent $8 million to mortgagor on Dec. 13, 2007, to enable the latter to purchase property in Orange County. Before making the loan, the bank obtained a title report disclosing the existence of three mortgages totaling $2,350,000. All three mortgages were satisfied from the loan proceeds. The title report, however, did not disclose the existence of a fourth mortgage, the one held by the senior mortgagee who brought the instant foreclosure action. This mortgage was junior to the three satisfied mortgages, but recorded before the bank extended its $8 million mortgage loan. When mortgagor defaulted on the senior mortgage, senior mortgagee brought this foreclosure action, alleging that its lien was senior to the bank's mortgage. The bank invoked the doctrine of equitable subrogation, arguing that when the funds it advanced were used to satisfy the three mortgages that had the most senior priority, the bank stepped into the shoes of those mortgagees, and acquired priority ahead of the foreclosing senior mortgagee. Supreme Court awarded summary judgment to the senior mortgagee, holding that the bank's subrogation claim was without merit because the bank took its mortgage with constructive knowledge of the senior mortgagee's interest.

In reversing, the Appellate Division noted that equitable subrogation doctrine is designed to prevent a junior lienor ' here the senior mortgagee ' from converting the mistake of a junior lender “into a magical gift for himself.” That is, if the bank in this case had not satisfied the most senior mortgages, the foreclosing mortgagee would hold its mortgage subject to those earlier mortgages. Equitable subrogation places the bank's mortgage into the position of the mortgages satisfied with proceeds advanced by the bank. The court then held that the bank's constructive knowledge of the foreclosing mortgagee's mortgage does not constitute a bar to application of equitable subrogation doctrine, although the court suggested that actual knowledge of the intervening mortgage would bar equitable subrogation.

COMMENT

Pursuant to New York's race-notice recording statute, a mortgagee generally enjoys priority when the mortgagee has no knowledge of a prior interest and wins the race to the recording office. New York courts, however, permit the doctrine of equitable subrogation to give a junior mortgagee priority over an intervening mortgage where the funds advanced by the junior mortgagee have been used to satisfy the mortgage that enjoys first priority. Thus, in King v. Pelkofski, 20 NY2d 326, the Court of Appeals applied the doctrine to protect a junior mortgagee whose funds were used to pay off a senior mortgage even though an intervening mortgage had been recorded at the time the junior mortgagee advanced the funds. In King, the husband conveyed a beneficial interest in a mortgaged bowling alley to his wife by an inter vivos trust agreement. After the trust agreement was recorded, the husband conveyed a mortgage to junior mortgagee in return for funds the husband used to satisfy prior mortgages on the property. When husband defaulted on the junior mortgage loan, the Court of Appeals determined that the junior mortgage was entitled to be subrogated into the priority position of the senior interests satisfied with the proceeds of the junior mortgage loan. The fact that the wife's trust agreement had been recorded at the time junior mortgagee advanced the funds ' giving junior mortgagee constructive notice of the trust ' did not prevent the application of the equitable subrogation doctrine to prevent the unjust enrichment of the intervening mortgagee.

Despite King, several Second Department cases had held that constructive notice barred equitable subrogation. For example, in Bank One v. Mui, 38 AD3d 809, the Second Department held that a junior mortgage could be subrogated into the priority rights of the senior mortgage only over unrecorded intervening interests. Bank One involved four mortgages. Funds from the junior mortgage were used to satisfy the mortgage that enjoyed the priority position. Only one of the two intervening mortgages had been recorded. The court determined that the junior mortgagee was entitled to be subrogated to the priority position only with respect to the unrecorded intervening mortgage. Citing King, the court held that notice of an intervening mortgage barred equitable subrogation, failing to distinguish actual notice from constructive notice. By contrast, the Third Department in Elwood v. Hoffman, 61 AD3d 1073, held that constructive notice of a recorded notice of pendency did not render equitable subrogation inapplicable. Junior mortgagee advanced funds used to satisfy a first mortgage on which record owner and her former companion were both liable. Although the junior mortgage was extended after record owner's former companion had filed a notice of pendency, the court relied on King, and emphasized that denying the use of the doctrine would allow the companion to receive a windfall because the funds advanced by the junior mortgagee were used to pay off the companion's share of the outstanding mortgage.

The court in Arbor adopted the position of the Third Departmen,t holding that only actual notice, but not constructive notice, bars equitable subrogation. The court explicitly overruled portions of Bank One and other Second Department cases that were inconsistent with this view. Absent actual knowledge of the intervening mortgage, it may be presumed that the junior mortgagee satisfied the senior mortgage to protect his own interests, not to make what the Arbor court called a “magical gift” to the intervening mortgagee. (quoting United States v. Baran, 996 F2d 25; Long Is. City Sav & Loan Assn. v. Shaw, 25 AD2d 880, 881). By contrast, where a mortgagee had actual knowledge of an intervening mortgage, the satisfaction of prior liens may be considered voluntary payment, barring any claim of unjust enrichment in the absence of mistake or fraud.

Ex-Fianc' Entitled to Rescind Deed

Connolly v. Knight

NYLJ 5/14/12, p. 2, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action for a judgment declaring that record owner's fianc'e owns real property as a joint tenant with the record owner, fianc'e appealed from Supreme Court's judgment declaring that she has no ownership interest in the property. The Appellate Division affirmed, holding that record owner was entitled to rescind the deed he had executed.

In 2000, the parties to this dispute became engaged. A year later, record owner purchased vacant land and built a house. In 2002, record owner executed a deed conveying the property to himself and his fianc'e as joint tenants. He recorded the deed on Dec. 3, 2002, but the county clerk discovered that the deed had not been notarized, and returned it to record owner. Record owner elected not to correct the deed. The parties never married, and the relationship had ended by 2008. Fianc'e then brought this action seeking a declaration that she owned the property as a joint tenant with record owner. Supreme Court, after a nonjury trial, directed entry of a judgment declaring that fianc'e does not own the property as a joint tenant.

In affirming, the Appellate Division emphasized that evidence at trial had established that the sole consideration for the deed was the contemplated marriage, which did not occur. As a result, the court held that record owner was entitled to rescind the deed.

COMMENT

When two parties agree to marry, New York courts presume that all gifts given subsequent to that agreement were given in contemplation of marriage, and permit the donor to recover the property or its value. Although, by statute, New York does not recognize a claim for breach of a marriage contract, section 80-b of the Civil Rights Law makes it clear that the statute precluding claims for breach of a marriage contract does not preclude a claim for recovery of property given in contemplation of marriage that failed to occur. Thus, in Gaden v. Gaden, 29 N.Y.2d 80, Elmer Gaden, then divorced from Dorothy, contracted to buy property, and arranged to have title vested in the names of “Elmer Gaden, Jr., and Dorothy J. Gaden, his wife.” At the time, the parties had resumed living together in contemplation of remarriage. When the contemplated marriage did not occur, Dorothy brought a partition action claiming that, as tenant in common, she was entitled to an interest in the property. Rejecting her argument that she retained an interest in the property despite her cancelled engagement, the Court of Appeals ordered her to execute and deliver a deed to her ex-husband, relying on affirmed findings of fact that the husband's gift “was conditioned upon the marriage of the parties.”

The presumption that transfers made after an agreement to marry are conditional gifts, recoverable by the donor if the marriage does not occur, may be rebutted by uncontested statements proving that one party unequivocally told the other that marriage would not occur. Thus, in Von Bing v. Mangione, 309 A.D.2d 1038, the Third Department remanded a donor's claim for return of gifts made to his fianc'e, because the donor admitted that he continued to make gifts to the fianc'e even after she unequivocally told him that a marriage would never occur. The court held that a trial was necessary to determine which gifts were actually made in contemplation of marriage. By contrast, the donee's own assertion that a gift of a diamond ring was made out of love and affection and not solely in contemplation of marriage, is generally insufficient to preclude the donor's action for the return of property. See Friedman v. Geller, 82 Misc.2d 291.

Notice of Pendency

DeCaro v. East of East, LLC

NYLJ 5/25/12, p. 27, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In seller's action for breach of contract, purchaser appealed from Supreme Court's denial of its motion to cancel a notice of pendency and for an award of costs caused by filing of the notice. The Appellate Division modified to cancel the notice, holding that seller's complaint, even if meritorious, no longer had any effect on an interest in real property.

Seller agreed to convey title to purchaser in return for a 22.1% interest in the corporate purchaser. Purchaser planned to develop a condominium on the property, and the contract gave purchaser the option to transfer two of the units, or $1 million, to redeem the 22.1% interest it promised seller. Seller subsequently filed an action demanding transfer of the 22.1% interest, and filed a notice of pendency. Purchaser then confirmed in writing that seller had a 22.1% interest, but notified seller of its election to pay $1 million, at a time of purchaser's choosing, to redeem its interest. Seller then filed a supplemental complaint alleging breach by failing to pay the $1 million immediately, at the time purchaser made its election. Supreme Court then denied purchaser's motion to cancel the notice of pendency.

In modifying, the Appellate Division held that once it was clear that purchaser had conceded seller's ownership in a 22.1% share, the only cause of action remaining was a claim for money damages. That claim for money damages would not affect title to real property (since the corporation would own the real property regardless of the judgment), and therefore would not support a notice of pendency.

Covenant Ambiguity

Birch Tree Partners, LLC v. Windsor Digital Studio, LLC

NYLJ 5/25/12, p. 28, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to enjoin violations of a restrictive covenant, burdened party appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division modified to grant summary judgment dismissing the cause of action seeking removal of a privet hedge, but otherwise affirmed, concluding that ambiguity in the language of the covenant precluded summary judgment.

The subject parcel is a small piece of land lying between larger parcels owned by the benefited and burdened party. The covenant provides that the land will be “perpetually unavailable for the erection of any building or structure” and that “no desirable trees or vegetation shall be removed” in a manner that would detract from the property's use as a screen between the two parcels. Burdened party allegedly removed trees and plants, installed a fence, and planted a privet hedge, provoking this action. Burdened party moved for summary judgment dismissing the complaint, and Supreme Court denied the motion.

In modifying, the Appellate Division held that summary judgment should have been granted with respect to the privet hedge, because nothing in the covenant precludes introduction of new vegetation. As to the remainder of the complaint, however, the court held that the covenant was ambiguous about whether a fence should be considered a structure and about what constituted “desirable” trees and vegetation. As a result, Supreme Court properly denied summary judgment.

Improperly Indexed Notice of Pendency

Del Pozo v. Impressive Homes, Inc.

NYLJ 6/1/12, p. 33, col. 6

AppDiv, Second Dept.

(memorandum opinion)

When seller cancelled a sale contract with purchaser, purchaser brought this action against seller for specific performance. Purchaser filed the complaint on March 4, 2004, together with a notice of pendency. Due to a clerical error in the Queens County Clerk's office, the notice of pendency was never indexed against the subject property. Three years later, when purchaser sought to extend the notice, the error was discovered and the notice was properly indexed. At that point, purchasers amended the complaint to add subsequent purchasers and mortgagees of the property. Those purchasers and mortgagees moved for summary judgment dismissing the complaint, and Supreme Court granted their motion.

In affirming, the Appellate Division held that an error in indexing a notice of pendency prevents the notice from constituting constructive notice until the error is corrected. As a result, in this case, subsequent purchasers and mortgagees were not on constructive notice of purchaser's interest. Because none of them had actual notice of purchaser's interest, subsequent purchasers and mortgagees were all entitled to summary judgment.

Equitable Subrogation

Arbor Commercial Mortgage, LLC v. Associates at the Palm, LLC

NYLJ 5/25/12, p. 22, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a senior mortgage, a bank holding a junior mortgage appealed from Supreme Court's grant of summary judgment to the senior mortgagee. The Appellate Division reversed, holding that the bank was entitled to invoke the doctrine of equitable subrogation even though the bank had constructive knowledge of the senior mortgage.

The bank lent $8 million to mortgagor on Dec. 13, 2007, to enable the latter to purchase property in Orange County. Before making the loan, the bank obtained a title report disclosing the existence of three mortgages totaling $2,350,000. All three mortgages were satisfied from the loan proceeds. The title report, however, did not disclose the existence of a fourth mortgage, the one held by the senior mortgagee who brought the instant foreclosure action. This mortgage was junior to the three satisfied mortgages, but recorded before the bank extended its $8 million mortgage loan. When mortgagor defaulted on the senior mortgage, senior mortgagee brought this foreclosure action, alleging that its lien was senior to the bank's mortgage. The bank invoked the doctrine of equitable subrogation, arguing that when the funds it advanced were used to satisfy the three mortgages that had the most senior priority, the bank stepped into the shoes of those mortgagees, and acquired priority ahead of the foreclosing senior mortgagee. Supreme Court awarded summary judgment to the senior mortgagee, holding that the bank's subrogation claim was without merit because the bank took its mortgage with constructive knowledge of the senior mortgagee's interest.

In reversing, the Appellate Division noted that equitable subrogation doctrine is designed to prevent a junior lienor ' here the senior mortgagee ' from converting the mistake of a junior lender “into a magical gift for himself.” That is, if the bank in this case had not satisfied the most senior mortgages, the foreclosing mortgagee would hold its mortgage subject to those earlier mortgages. Equitable subrogation places the bank's mortgage into the position of the mortgages satisfied with proceeds advanced by the bank. The court then held that the bank's constructive knowledge of the foreclosing mortgagee's mortgage does not constitute a bar to application of equitable subrogation doctrine, although the court suggested that actual knowledge of the intervening mortgage would bar equitable subrogation.

COMMENT

Pursuant to New York's race-notice recording statute, a mortgagee generally enjoys priority when the mortgagee has no knowledge of a prior interest and wins the race to the recording office. New York courts, however, permit the doctrine of equitable subrogation to give a junior mortgagee priority over an intervening mortgage where the funds advanced by the junior mortgagee have been used to satisfy the mortgage that enjoys first priority. Thus, in King v. Pelkofski, 20 NY2d 326, the Court of Appeals applied the doctrine to protect a junior mortgagee whose funds were used to pay off a senior mortgage even though an intervening mortgage had been recorded at the time the junior mortgagee advanced the funds. In King, the husband conveyed a beneficial interest in a mortgaged bowling alley to his wife by an inter vivos trust agreement. After the trust agreement was recorded, the husband conveyed a mortgage to junior mortgagee in return for funds the husband used to satisfy prior mortgages on the property. When husband defaulted on the junior mortgage loan, the Court of Appeals determined that the junior mortgage was entitled to be subrogated into the priority position of the senior interests satisfied with the proceeds of the junior mortgage loan. The fact that the wife's trust agreement had been recorded at the time junior mortgagee advanced the funds ' giving junior mortgagee constructive notice of the trust ' did not prevent the application of the equitable subrogation doctrine to prevent the unjust enrichment of the intervening mortgagee.

Despite King, several Second Department cases had held that constructive notice barred equitable subrogation. For example, in Bank One v. Mui, 38 AD3d 809, the Second Department held that a junior mortgage could be subrogated into the priority rights of the senior mortgage only over unrecorded intervening interests. Bank One involved four mortgages. Funds from the junior mortgage were used to satisfy the mortgage that enjoyed the priority position. Only one of the two intervening mortgages had been recorded. The court determined that the junior mortgagee was entitled to be subrogated to the priority position only with respect to the unrecorded intervening mortgage. Citing King, the court held that notice of an intervening mortgage barred equitable subrogation, failing to distinguish actual notice from constructive notice. By contrast, the Third Department in Elwood v. Hoffman, 61 AD3d 1073, held that constructive notice of a recorded notice of pendency did not render equitable subrogation inapplicable. Junior mortgagee advanced funds used to satisfy a first mortgage on which record owner and her former companion were both liable. Although the junior mortgage was extended after record owner's former companion had filed a notice of pendency, the court relied on King, and emphasized that denying the use of the doctrine would allow the companion to receive a windfall because the funds advanced by the junior mortgagee were used to pay off the companion's share of the outstanding mortgage.

The court in Arbor adopted the position of the Third Departmen,t holding that only actual notice, but not constructive notice, bars equitable subrogation. The court explicitly overruled portions of Bank One and other Second Department cases that were inconsistent with this view. Absent actual knowledge of the intervening mortgage, it may be presumed that the junior mortgagee satisfied the senior mortgage to protect his own interests, not to make what the Arbor c ourt called a “magical gift” to the intervening mortgagee. (quoting United States v. Baran, 996 F2d 25 ; Long Is. City Sav & Loan Assn. v. Shaw, 25 AD2d 880, 881). By contrast, where a mortgagee had actual knowledge of an intervening mortgage, the satisfaction of prior liens may be considered voluntary payment, barring any claim of unjust enrichment in the absence of mistake or fraud.

Ex-Fianc' Entitled to Rescind Deed

Connolly v. Knight

NYLJ 5/14/12, p. 2, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action for a judgment declaring that record owner's fianc'e owns real property as a joint tenant with the record owner, fianc'e appealed from Supreme Court's judgment declaring that she has no ownership interest in the property. The Appellate Division affirmed, holding that record owner was entitled to rescind the deed he had executed.

In 2000, the parties to this dispute became engaged. A year later, record owner purchased vacant land and built a house. In 2002, record owner executed a deed conveying the property to himself and his fianc'e as joint tenants. He recorded the deed on Dec. 3, 2002, but the county clerk discovered that the deed had not been notarized, and returned it to record owner. Record owner elected not to correct the deed. The parties never married, and the relationship had ended by 2008. Fianc'e then brought this action seeking a declaration that she owned the property as a joint tenant with record owner. Supreme Court, after a nonjury trial, directed entry of a judgment declaring that fianc'e does not own the property as a joint tenant.

In affirming, the Appellate Division emphasized that evidence at trial had established that the sole consideration for the deed was the contemplated marriage, which did not occur. As a result, the court held that record owner was entitled to rescind the deed.

COMMENT

When two parties agree to marry, New York courts presume that all gifts given subsequent to that agreement were given in contemplation of marriage, and permit the donor to recover the property or its value. Although, by statute, New York does not recognize a claim for breach of a marriage contract, section 80-b of the Civil Rights Law makes it clear that the statute precluding claims for breach of a marriage contract does not preclude a claim for recovery of property given in contemplation of marriage that failed to occur. Thus, in Gaden v. Gaden, 29 N.Y.2d 80, Elmer Gaden, then divorced from Dorothy, contracted to buy property, and arranged to have title vested in the names of “Elmer Gaden, Jr., and Dorothy J. Gaden, his wife.” At the time, the parties had resumed living together in contemplation of remarriage. When the contemplated marriage did not occur, Dorothy brought a partition action claiming that, as tenant in common, she was entitled to an interest in the property. Rejecting her argument that she retained an interest in the property despite her cancelled engagement, the Court of Appeals ordered her to execute and deliver a deed to her ex-husband, relying on affirmed findings of fact that the husband's gift “was conditioned upon the marriage of the parties.”

The presumption that transfers made after an agreement to marry are conditional gifts, recoverable by the donor if the marriage does not occur, may be rebutted by uncontested statements proving that one party unequivocally told the other that marriage would not occur. Thus, in Von Bing v. Mangione, 309 A.D.2d 1038, the Third Department remanded a donor's claim for return of gifts made to his fianc'e, because the donor admitted that he continued to make gifts to the fianc'e even after she unequivocally told him that a marriage would never occur. The court held that a trial was necessary to determine which gifts were actually made in contemplation of marriage. By contrast, the donee's own assertion that a gift of a diamond ring was made out of love and affection and not solely in contemplation of marriage, is generally insufficient to preclude the donor's action for the return of property. See Friedman v. Geller, 82 Misc.2d 291.

Notice of Pendency

DeCaro v. East of East, LLC

NYLJ 5/25/12, p. 27, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In seller's action for breach of contract, purchaser appealed from Supreme Court's denial of its motion to cancel a notice of pendency and for an award of costs caused by filing of the notice. The Appellate Division modified to cancel the notice, holding that seller's complaint, even if meritorious, no longer had any effect on an interest in real property.

Seller agreed to convey title to purchaser in return for a 22.1% interest in the corporate purchaser. Purchaser planned to develop a condominium on the property, and the contract gave purchaser the option to transfer two of the units, or $1 million, to redeem the 22.1% interest it promised seller. Seller subsequently filed an action demanding transfer of the 22.1% interest, and filed a notice of pendency. Purchaser then confirmed in writing that seller had a 22.1% interest, but notified seller of its election to pay $1 million, at a time of purchaser's choosing, to redeem its interest. Seller then filed a supplemental complaint alleging breach by failing to pay the $1 million immediately, at the time purchaser made its election. Supreme Court then denied purchaser's motion to cancel the notice of pendency.

In modifying, the Appellate Division held that once it was clear that purchaser had conceded seller's ownership in a 22.1% share, the only cause of action remaining was a claim for money damages. That claim for money damages would not affect title to real property (since the corporation would own the real property regardless of the judgment), and therefore would not support a notice of pendency.

Covenant Ambiguity

Birch Tree Partners, LLC v. Windsor Digital Studio, LLC

NYLJ 5/25/12, p. 28, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to enjoin violations of a restrictive covenant, burdened party appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division modified to grant summary judgment dismissing the cause of action seeking removal of a privet hedge, but otherwise affirmed, concluding that ambiguity in the language of the covenant precluded summary judgment.

The subject parcel is a small piece of land lying between larger parcels owned by the benefited and burdened party. The covenant provides that the land will be “perpetually unavailable for the erection of any building or structure” and that “no desirable trees or vegetation shall be removed” in a manner that would detract from the property's use as a screen between the two parcels. Burdened party allegedly removed trees and plants, installed a fence, and planted a privet hedge, provoking this action. Burdened party moved for summary judgment dismissing the complaint, and Supreme Court denied the motion.

In modifying, the Appellate Division held that summary judgment should have been granted with respect to the privet hedge, because nothing in the covenant precludes introduction of new vegetation. As to the remainder of the complaint, however, the court held that the covenant was ambiguous about whether a fence should be considered a structure and about what constituted “desirable” trees and vegetation. As a result, Supreme Court properly denied summary judgment.

Improperly Indexed Notice of Pendency

Del Pozo v. Impressive Homes, Inc.

NYLJ 6/1/12, p. 33, col. 6

AppDiv, Second Dept.

(memorandum opinion)

When seller cancelled a sale contract with purchaser, purchaser brought this action against seller for specific performance. Purchaser filed the complaint on March 4, 2004, together with a notice of pendency. Due to a clerical error in the Queens County Clerk's office, the notice of pendency was never indexed against the subject property. Three years later, when purchaser sought to extend the notice, the error was discovered and the notice was properly indexed. At that point, purchasers amended the complaint to add subsequent purchasers and mortgagees of the property. Those purchasers and mortgagees moved for summary judgment dismissing the complaint, and Supreme Court granted their motion.

In affirming, the Appellate Division held that an error in indexing a notice of pendency prevents the notice from constituting constructive notice until the error is corrected. As a result, in this case, subsequent purchasers and mortgagees were not on constructive notice of purchaser's interest. Because none of them had actual notice of purchaser's interest, subsequent purchasers and mortgagees were all entitled to summary judgment.