Real Property Law

AppDiv, Second Dept.

(memorandum opinion)

In an action by home purchaser against mortgagee bank and a real estate appraisal firm and its principal for violation of General Business Law (GBL) section 349, for fraud, and for negligence in performing the appraisal, the appraisal firm and its principal appealed from Supreme Court's order denying their motions to dismiss. The Appellate Division modified to grant the dismissal motions with respect to the three claims, citing purchaser's failure to allege facts to support the claims.

Purchasers alleged that, as part of a predatory lending scheme, the appraisal firm overvalued the subject property in order to enable purchasers to obtain a mortgage they could not afford. Purchasers contended that the inflated appraisal constituted a deceptive act in the conduct of business, in violation of GBL 349, and also constituted fraud, and negligence in conducting the appraisal.

In holding that Supreme Court should have granted the motion to dismiss, the court first held that to establish a claim under GBL 349, a plaintiff must allege that deceptive acts and practices misled them in a material way. Here, the court concluded that purchasers did not make the requisite allegation. The court then turned to the fraud claim, and held that the claim failed because purchaser failed to allege that they relied upon any alleged misrepresentation by the appraisal firm's principal. Finally, in holding that the negligence claim should have been dismissed, the court held that purchasers had failed to allege facts that would support a determination that the appraisal firm or its principal owed them a duty of care in performing the appraisal.

COMMENT

In Chambers v. Executive Mortg. Corp., 229 A.D.2d 416, the court held that real estate appraisers retained by a mortgage broker are not liable to homeowners for alleged inaccurate appraisals. In Chambers, homeowners entered into a contract for the sale of their home that provided either party could terminate the contract in the event purchasers couldn't obtain a mortgage for less than $225,000. Appraisers valued the property at less than the contracted sale price and purchasers, unable to secure a loan, terminated the contract. The court held that the appraisers did not owe a duty of care to the homeowners, and thus were not liable under tort law to homeowners for allegedly undervaluing the property. Further, the court dismissed the cause of action to recover damages for tortious interference with contractual relations, because no contract had been breached.

By contrast, real estate appraisers who are aware that their appraisals will be relied on by third parties in determining whether to provide financing may be held liable to such lenders for providing inaccurate appraisals.

In Rodin Properties-Shore Mall N.V. v. Ullman, 264 A.D.2d 367, lender's cause of action against a real estate appraiser for negligently inflating the property value survived summary judgment where an appraiser retained by borrower knew that lender would rely on the appraisal. In Rodin, lender claimed that the
report prepared by appraiser with full knowledge that lender would rely on the appraisal in determining whether to grant a loan, contained material misrepresentations and inflated the actual value of the property. The court determined that an appraiser who is aware that a third party will rely on its appraisal owes a duty of care to lender independent of any contractual obligation. The court indicated that lender's allegations of fraud, gross negligence, and negligent misrepresentation were properly pleaded. See also Chem. Bank v. Nat'l Union Fire Ins. Co. of Pittsburgh, 74 A.D.2d 786 (refusing to dismiss on summary judgment lender's cause of action against real estate appraiser for negligently overstating the property value where appraiser knew lender would rely on the appraisal).

Satisfaction Ineffective

JP Morgan Chase Bank, NA v. Widing

NYLJ 7/25/12

Supreme Ct., Nassau Cty.

(Galasso, J.)

In an action to foreclose a mortgage, purchaser from the mortgagor sought a determination that it owned the subject property free of the mortgage. The court denied purchaser's motion, holding that purchaser could not rely on a satisfaction of the mortgage when the record revealed that the satisfaction was executed by a party who no longer had an interest in the mortgage.

In 2001, Widing, then the owner of the subject parcel, executed a mortgage to Old Kent Mortgage Company. The mortgage was recorded, and, on Dec. 3, 2001, an assignment from Old Kent to State Street Bank was also recorded. On Nov. 20, 2003, State Street assigned to WAMU, and WAMU recorded. Two weeks later, however, Widing and WAMU executed a mortgage consolidation, extension, and modification agreement (CEMA). The CEMA was never recorded. Then, in 2004, Widing obtained from Old Kent a satisfaction of the mortgage. Then, in 2011, Widing sold the property to Margolis for $495,000. Subsequently, Chase, as successor to WAMU, brought this action to foreclose the CEMA mortgage. Margolis sought summary judgment, contending that it had no actual or constructive notice of the Chase mortgage.

The court denied Margolis' summary judgment motion, and directed the county clerk to expunge the satisfaction from the record, holding that because Old Kent's assignment to State Street had been recorded in 2003, Margolis was on notice that Old Kent had no power to discharge the mortgage in 2004. As a result, Margolis could not claim the protection of the recording act. The court did, however, conclude that a hearing was necessary to determine whether Chase had standing to bring the foreclosure action because it appears that Chase had filed a satisfaction of the mortgage two weeks before bringing this action. (Chase contends that the satisfaction was filed in error.)

Laches Bars Claim by Daughters of Former Owner

Chisolm v. Williams

NYLJ 8/8/12

Supreme Ct., Kings Cty.

(Schmidt, J.)

In an action by daughters of the former owner to establish that they hold title to the property free of a mortgage executed by former owner's wife after former owner's death, both the daughters and the mortgagee bank sought summary judgment. The court denied both motions, holding that questions of fact remained about whether the daughters' claim should be barred by laches.

Former owner's will devised the subject property, the family home, to his two daughters. At the time of his 1989 death, however, he lived in the home with his wife (not the mother of the daughters), but not with the daughters. The daughters did not immediately probate the will, because their stepmother was upset about its contents. They agreed to allow the stepmother to live in the house so long as she kept it up and paid taxes. By 1993, the lawyer who had the copy of the original will could no longer find it, and the daughters brought a proceeding to probate a copy of the will that was still in their possession. They did not complete the probate proceeding for lack of funds. Meanwhile, in 1991, the stepmother executed and recorded a deed from herself to herself and her sister as tenants in common, and the two of them then executed a mortgage in the principal amount of $65,000. Over the next 14 years, the two sisters executed at least three deeds conveying the home between themselves, and also executed six other mortgages.

In early 2005, one of the daughters, when checking to make sure the taxes were up to date, discovered the stepmother's transfer of title, and brought an action to quiet title and to complete probate. The following month, the stepmother mortgaged the property to defendant mortgagee, FFA, to secure a debt of $469,342.50. In this action, originally brought against the stepmother and her sister, FFA intervened to contend that any interest the daughters have is subject to FFA's mortgage. Both the daughters and FFA sought summary judgment

In denying both motions, the court held that questions of fact remained with respect to FFA's assertion of a laches defense. FFA argued that the daughters' claim should be barred because they waited more than 15 years after former owner's death to bring this claim asserting ownership of the property. The court noted that to succeed on its laches defense, FFA would have to establish a lack of knowledge on its part that the daughter s would assert a claim. Here, however, the daughters argued that FFA was on constructive notice of their interest because a complete title search would have included a search of the Surrogate's Court records, which would have provided notice of the daughters' 1993 proceeding, and of the daughters' interest in the property. The court held that in the absence of expert witness affidavits, it could not determine whether FFA's due diligence adhered to a standard common among lenders. As a result, summary judgment was inappropriate. Moreover, the court also indicated that there were questions of fact about whether the daughters' delay was excusable in light of loss of the will by the stepmother's lawyer.

Mortgagee Not Entitled to Reformation

US Bank, N.A. v. Lieberman

NYLJ 8/10/12, p. 23, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagee bank appealed from Supreme Court's grant of summary judgment dismissing the complaint against mortgagor's wife. The Appellate Division affirmed, holding that the bank was entitled neither to reformation of the mortgage nor to imposition of an equitable lien.

Husband and wife had purchased the subject property by personally signing the sale contract and conducting the rest of the transaction by power of attorney. The deed vested title in both spouses, but the note and mortgage executed on their behalf named only the husband as borrower. The couple subsequently became embroiled in divorce proceedings, and a court directed husband to make payments on the mortgage; he defaulted. Mortgagee bank then foreclosed, but because the property was still held as tenants by the entirety, and would not be subject to partition until the divorce became final, mortgagee bank sought to reform the deed and mortgage to add the wife's name as mortgagor. Supreme Court awarded summary judgment to the wife, and the bank appealed.

In affirming, the Appellate Division noted that the bank had submitted no proof to suggest that the wife was ever a party to the mortgage. Reformation for mutual mistake requires proof that the agreement does not reflect the intent of either party, while reformation for a scrivener's error requires proof of a prior agreement between the parties which, when reduced to writing, failed to accurately reflect the agreement. Here, there was no such evidence, and the court emphasized that it was the bank that prepared the note that had only the husband's name, not the wife's preprinted on it. The court also held that mortgagee was not entitled to impose an equitable lien against the wife's interest because there was no evidence that the wife ever agreed or intended to have the bank place a lien on her interest.

COMMENT

When only one spouse conveys a mortgage on tenancy by the entireties property, and the marriage remains legally intact, a foreclosing mortgagee's rights are limited to the rights of the mortgagor spouse. That is, if the mortgagee buys the mortgagor's interest at a foreclosure sale, the mortgagee acquires a contingent right of survivorship, but not the right to partition the entireties property. For example, in Scarison, Inc. v. Paracha, 7 A.D.3d 605, a judgment creditor purchased a husband's interest in property held by the entireties at a judicial sale, and sought to partition the property. The husband and wife argued that because they owned the property as tenants by the entireties, the judgment creditor could not maintain his action for partition. The court agreed, holding that a tenancy by the entireties “is a special type of ownership that is not severable by partition as long as the marriage exists.” Id. at 606. The court relied on RPAPL ' 901 (describing who may bring an action for partition as limited to “a person holding and in possession of real property as joint tenant or tenant in common”). In dictum, the Court of Appeals has held that this same rule applies to mortgagees when only one spouse executed the mortgage. See V.R.W., Inc. v. Klein, 68 N.Y.2d at 562.

However, if tenants by the entireties divorce, thereby dissolving the tenancy by the entireties, the mortgagee will have a right to judicial partition by sale, enabling the mortgagee to realize on its security interest. For example, in V.R.W., Inc. v. Klein, 68 N.Y.2d 560, the mortgagee obtained an interest in entireties property that was effective only against the husband. The husband then defaulted on the loan secured by the mortgage, and following a foreclosure action, the parties divorced. The court reasoned that when the parties divorced, the tenancy by the entireties dissolved and became a tenancy in common. Further, the court noted, the mortgagee had acquired the husband's interest in the tenancy in common only and not the wife's interest, because the mortgage was effective only as to the husband (the wife's signature, as it turned out, was forged). Finding that “the grantee or foreclosing mortgagee ' steps into the shoes of the grantor or mortgagor, “the court held that the mortgagee was now in the shoes of the former husband/mortgagor, who was now a tenant in common. As a result, the mortgagee could now successfully bring an action to partition the property. Id. at 565.

But even after divorce, the mortgagee's right to partition is not absolute; if the court finds that a divorce judgment or a separation agreement gives either spouse a right to exclusive occupancy for a fixed period of time after the divorce, the mortgagee has no right to partition during that fixed period. For example, in Solomon v. Barth, 135 Misc.2d 574, the husband and wife, prior to their divorce, were tenants by the entireties. The couple entered into a separation agreement by which the wife was entitled to exclusive occupancy of the property “until such time as the youngest child of the marriage becomes emancipated.” Id. at 575. After the divorce, the husband filed for bankruptcy and his interest in the property was conveyed to a bankruptcy creditor. The bankruptcy creditor then sought to compel partition of the property, though the period of exclusive occupancy in the wife had not expired. The court held that even though the bankruptcy creditor had no knowledge of the exclusive occupancy arrangement at the time she obtained her interest in the property, she was still bound by it. Invoking V.R.W. and principles of equity, the court stated that since the husband could not compel partition, neither could his transferee.

By contrast, where a divorce judgment is silent as to the duration of the exclusive occupancy, courts deem the right of exclusive occupancy to be limited to a “reasonable duration,” absent an express or implied agreement to the contrary. For instance, in Pando v. Tapia, 79 A.D.3d 993, as in Solomon, upon divorce, the wife was awarded exclusive occupancy of tenancy by the entireties property. However, because, unlike Solomon, the wife's right to exclusive occupancy was not limited in duration, the court held that the wife's right “must be deemed limited to a reasonable duration.” Id. at 994-95.Ultimately, the court held that 30 years of exclusive occupancy, which had already passed, was reasonable. Similarly, in Luvera v. Luvera, 119 A.D.2d 810, 812 ,the court upheld an even shorter period of exclusive occupancy as reasonable ' 15 years ' where the divorce judgment granted the wife “exclusive use and occupancy of the marital premises 'until such time as same shall be sold.'” Id. at 810. The court found “until such time as same shall be sold” to be an indefinite period. Further, it determined that 15 years was reasonable because the wife's children with her former husband were over 18 years old, and the wife had remarried and was residing in the former marital residence with her current husband.

Reimbursement for Advances

Bank of America v. Oneonta, L.P.

NYLJ 7/30/12

AppDiv, Third Dept.

(Opinion by McCarthy, J.)

On mortgagee's motion to confirm a referee's report, mortgagee appealed from Supreme Court's order denying reimbursement for advances made by the mortgagee after appointment of a receiver. The Appellate Division modified to grant mortgagee's request for reimbursement of monies paid for taxes and insurance, but otherwise affirmed, holding that Supreme Court had not abused its discretion.

The mortgage agreement expressly permitted mortgagee to make any payments or pay any actions required under the mortgage if mortgagor were to default, and the mortgage expressly required mortgagor to pay taxes and to maintain insurance on the premises. Another provision permitted mortgagee to enter the premises to conduct an environmental assessment and an appraisal after default by the mortgagor, with those costs to become part of the debt owed under the mortgage. When mortgagor defaulted, mortgagee defaulted and sought appointment of a receiver. The court appointed a receiver, but after appointment of the receiver, mortgagee spent a total of $112,185.42 on a number of items related to the property, including payment of taxes and insurance, and payment for environmental assessments, appraisal reports, and marketing commissions to a real estate marketing company. When the property was sold at a foreclosure sale, the sale brought a surplus. Out of the surplus, the referee allowed the mortgagee all of the expenses incurred by the mortgagee. When mortgagee sought to confirm the report, Supreme Court disallowed the $112,185.42 because the mortgagee was not authorized to make advances after appointment of a receiver. On reargument, Supreme Court allowed expenses for taxes and insurance, but without interest. Mortgagee appealed.

In modifying, the Appellate Division noted that the receiver should have paid taxes and insurance, and because these expenses were necessary, mortgagee was entitled to reimbursement with interest. As to the other expenses, however, the court noted that once the receiver was appointed, the mortgagee no longer had authority to take even those actions authorized by the mortgage instrument. The court acknowledged that many of the expenses mortgagee incurred were related to maximizing bids at the foreclosure sale, but nevertheless indicated that the prudent course for the mortgagee would have been to obtain prior judicial approval for making those expenditures. Absent prior approval, Supreme Court had discretion to authorize reimbursement, and the court's decision not to authorize reimbursement did not constitute an abuse of discretion.

Title Insurer Not Liable For Theft

Fidelity National Title Insurance Co. v. Cole Taylor Bank

NYLJ 7/17/12, p. 21, col. 3

U.S. Dist. Ct., SDNY

(Cedarbaum, J.)

In title insurer's action for a declaratory judgment that title insurance policies were never issued in connection with mortgage refinancing, both the title insurer and the mortgage lender agreed to try the case on stipulated facts. The court granted relief to the title insurer, holding that the settlement agent who absconded with funds was not the agent of the title insurer.

Mortgagee bank approved a mortgage loan for mortgagors, who were to use the proceeds to refinance an existing mortgage. The bank sought and obtained a title insurance commitment from Johns and Lee, which advertised itself as a “Full Service Title Company and Settlement Agent.” Johns and Lee had entered into an Agency Agreement with Fidelity National Title to serve as a policy issuing agent. On Oct. 4, 2010, mortgagee bank wired $219,169.48 to the bank account of Johns and Lee for the purpose of satisfying the outstanding mortgages. Johns and Lee's principal stole the funds for personal use. She did not pay mortgage recording fees, nor did she pay Fidelity the premium due for its title insurance policy, nor did she record the mortgagee bank's mortgage. When mortgagee bank discovered that the prior mortgages had not been satisfied, the bank wrote to Fidelity demanding full coverage for its losses. Fidelity contended that it was not liable, and brought this declaratory judgment action.

In granting declaratory relief to Fidelity, the court relied on testimony by the bank's own expert to establish that the bank should not reasonably believe that Johns and Lee was acting as Fidelity's agent when it accepted money as settlement agent. The court rejected the bank's argument that Johns and Lee was clothed with apparent authority to act on Fidelity's behalf in accepting the money. The court concluded that no title policies were issued, and that Fidelity was not therefore liable for any losses.

Mortgagee and Appraisal Firm Not Liable to Purchaser

Jones v. Bank of America, N.A.

NYLJ 7/14/12, p. 25, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action by home purchaser against mortgagee bank and a real estate appraisal firm and its principal for violation of General Business Law (GBL) section 349, for fraud, and for negligence in performing the appraisal, the appraisal firm and its principal appealed from Supreme Court's order denying their motions to dismiss. The Appellate Division modified to grant the dismissal motions with respect to the three claims, citing purchaser's failure to allege facts to support the claims.

Purchasers alleged that, as part of a predatory lending scheme, the appraisal firm overvalued the subject property in order to enable purchasers to obtain a mortgage they could not afford. Purchasers contended that the inflated appraisal constituted a deceptive act in the conduct of business, in violation of GBL 349, and also constituted fraud, and negligence in conducting the appraisal.

In holding that Supreme Court should have granted the motion to dismiss, the court first held that to establish a claim under GBL 349, a plaintiff must allege that deceptive acts and practices misled them in a material way. Here, the court concluded that purchasers did not make the requisite allegation. The court then turned to the fraud claim, and held that the claim failed because purchaser failed to allege that they relied upon any alleged misrepresentation by the appraisal firm's principal. Finally, in holding that the negligence claim should have been dismissed, the court held that purchasers had failed to allege facts that would support a determination that the appraisal firm or its principal owed them a duty of care in performing the appraisal.

COMMENT

In Chambers v. Executive Mortg. Corp., 229 A.D.2d 416, the court held that real estate appraisers retained by a mortgage broker are not liable to homeowners for alleged inaccurate appraisals. In Chambers, homeowners entered into a contract for the sale of their home that provided either party could terminate the contract in the event purchasers couldn't obtain a mortgage for less than $225,000. Appraisers valued the property at less than the contracted sale price and purchasers, unable to secure a loan, terminated the contract. The court held that the appraisers did not owe a duty of care to the homeowners, and thus were not liable under tort law to homeowners for allegedly undervaluing the property. Further, the court dismissed the cause of action to recover damages for tortious interference with contractual relations, because no contract had been breached.

By contrast, real estate appraisers who are aware that their appraisals will be relied on by third parties in determining whether to provide financing may be held liable to such lenders for providing inaccurate appraisals.

In Rodin Properties-Shore Mall N.V. v. Ullman, 264 A.D.2d 367, lender's cause of action against a real estate appraiser for negligently inflating the property value survived summary judgment where an appraiser retained by borrower knew that lender would rely on the appraisal. In Rodin, lender claimed that the
report prepared by appraiser with full knowledge that lender would rely on the appraisal in determining whether to grant a loan, contained material misrepresentations and inflated the actual value of the property. The court determined that an appraiser who is aware that a third party will rely on its appraisal owes a duty of care to lender independent of any contractual obligation. The court indicated that lender's allegations of fraud, gross negligence, and negligent misrepresentation were properly pleaded. See also Chem. Bank v. Nat'l Union Fire Ins. Co. of Pittsburgh, 74 A.D.2d 786 (refusing to dismiss on summary judgment lender's cause of action against real estate appraiser for negligently overstating the property value where appraiser knew lender would rely on the appraisal).

Satisfaction Ineffective

JP Morgan Chase Bank, NA v. Widing

NYLJ 7/25/12

Supreme Ct., Nassau Cty.

(Galasso, J.)

In an action to foreclose a mortgage, purchaser from the mortgagor sought a determination that it owned the subject property free of the mortgage. The court denied purchaser's motion, holding that purchaser could not rely on a satisfaction of the mortgage when the record revealed that the satisfaction was executed by a party who no longer had an interest in the mortgage.

In 2001, Widing, then the owner of the subject parcel, executed a mortgage to Old Kent Mortgage Company. The mortgage was recorded, and, on Dec. 3, 2001, an assignment from Old Kent to State Street Bank was also recorded. On Nov. 20, 2003, State Street assigned to WAMU, and WAMU recorded. Two weeks later, however, Widing and WAMU executed a mortgage consolidation, extension, and modification agreement (CEMA). The CEMA was never recorded. Then, in 2004, Widing obtained from Old Kent a satisfaction of the mortgage. Then, in 2011, Widing sold the property to Margolis for $495,000. Subsequently, Chase, as successor to WAMU, brought this action to foreclose the CEMA mortgage. Margolis sought summary judgment, contending that it had no actual or constructive notice of the Chase mortgage.

The court denied Margolis' summary judgment motion, and directed the county clerk to expunge the satisfaction from the record, holding that because Old Kent's assignment to State Street had been recorded in 2003, Margolis was on notice that Old Kent had no power to discharge the mortgage in 2004. As a result, Margolis could not claim the protection of the recording act. The court did, however, conclude that a hearing was necessary to determine whether Chase had standing to bring the foreclosure action because it appears that Chase had filed a satisfaction of the mortgage two weeks before bringing this action. (Chase contends that the satisfaction was filed in error.)

Laches Bars Claim by Daughters of Former Owner

Chisolm v. Williams

NYLJ 8/8/12

Supreme Ct., Kings Cty.

(Schmidt, J.)

In an action by daughters of the former owner to establish that they hold title to the property free of a mortgage executed by former owner's wife after former owner's death, both the daughters and the mortgagee bank sought summary judgment. The court denied both motions, holding that questions of fact remained about whether the daughters' claim should be barred by laches.

Former owner's will devised the subject property, the family home, to his two daughters. At the time of his 1989 death, however, he lived in the home with his wife (not the mother of the daughters), but not with the daughters. The daughters did not immediately probate the will, because their stepmother was upset about its contents. They agreed to allow the stepmother to live in the house so long as she kept it up and paid taxes. By 1993, the lawyer who had the copy of the original will could no longer find it, and the daughters brought a proceeding to probate a copy of the will that was still in their possession. They did not complete the probate proceeding for lack of funds. Meanwhile, in 1991, the stepmother executed and recorded a deed from herself to herself and her sister as tenants in common, and the two of them then executed a mortgage in the principal amount of $65,000. Over the next 14 years, the two sisters executed at least three deeds conveying the home between themselves, and also executed six other mortgages.

In early 2005, one of the daughters, when checking to make sure the taxes were up to date, discovered the stepmother's transfer of title, and brought an action to quiet title and to complete probate. The following month, the stepmother mortgaged the property to defendant mortgagee, FFA, to secure a debt of $469,342.50. In this action, originally brought against the stepmother and her sister, FFA intervened to contend that any interest the daughters have is subject to FFA's mortgage. Both the daughters and FFA sought summary judgment

In denying both motions, the court held that questions of fact remained with respect to FFA's assertion of a laches defense. FFA argued that the daughters' claim should be barred because they waited more than 15 years after former owner's death to bring this claim asserting ownership of the property. The court noted that to succeed on its laches defense, FFA would have to establish a lack of knowledge on its part that the daughter s would assert a claim. Here, however, the daughters argued that FFA was on constructive notice of their interest because a complete title search would have included a search of the Surrogate's Court records, which would have provided notice of the daughters' 1993 proceeding, and of the daughters' interest in the property. The court held that in the absence of expert witness affidavits, it could not determine whether FFA's due diligence adhered to a standard common among lenders. As a result, summary judgment was inappropriate. Moreover, the court also indicated that there were questions of fact about whether the daughters' delay was excusable in light of loss of the will by the stepmother's lawyer.

Mortgagee Not Entitled to Reformation

US Bank, N.A. v. Lieberman

NYLJ 8/10/12, p. 23, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagee bank appealed from Supreme Court's grant of summary judgment dismissing the complaint against mortgagor's wife. The Appellate Division affirmed, holding that the bank was entitled neither to reformation of the mortgage nor to imposition of an equitable lien.

Husband and wife had purchased the subject property by personally signing the sale contract and conducting the rest of the transaction by power of attorney. The deed vested title in both spouses, but the note and mortgage executed on their behalf named only the husband as borrower. The couple subsequently became embroiled in divorce proceedings, and a court directed husband to make payments on the mortgage; he defaulted. Mortgagee bank then foreclosed, but because the property was still held as tenants by the entirety, and would not be subject to partition until the divorce became final, mortgagee bank sought to reform the deed and mortgage to add the wife's name as mortgagor. Supreme Court awarded summary judgment to the wife, and the bank appealed.

In affirming, the Appellate Division noted that the bank had submitted no proof to suggest that the wife was ever a party to the mortgage. Reformation for mutual mistake requires proof that the agreement does not reflect the intent of either party, while reformation for a scrivener's error requires proof of a prior agreement between the parties which, when reduced to writing, failed to accurately reflect the agreement. Here, there was no such evidence, and the court emphasized that it was the bank that prepared the note that had only the husband's name, not the wife's preprinted on it. The court also held that mortgagee was not entitled to impose an equitable lien against the wife's interest because there was no evidence that the wife ever agreed or intended to have the bank place a lien on her interest.

COMMENT

When only one spouse conveys a mortgage on tenancy by the entireties property, and the marriage remains legally intact, a foreclosing mortgagee's rights are limited to the rights of the mortgagor spouse. That is, if the mortgagee buys the mortgagor's interest at a foreclosure sale, the mortgagee acquires a contingent right of survivorship, but not the right to partition the entireties property. For example, in Scarison, Inc. v. Paracha, 7 A.D.3d 605, a judgment creditor purchased a husband's interest in property held by the entireties at a judicial sale, and sought to partition the property. The husband and wife argued that because they owned the property as tenants by the entireties, the judgment creditor could not maintain his action for partition. The court agreed, holding that a tenancy by the entireties “is a special type of ownership that is not severable by partition as long as the marriage exists.” Id. at 606. The court relied on RPAPL ' 901 (describing who may bring an action for partition as limited to “a person holding and in possession of real property as joint tenant or tenant in common”). In dictum, the Court of Appeals has held that this same rule applies to mortgagees when only one spouse executed the mortgage. See V.R.W., Inc. v. Klein, 68 N.Y.2d at 562 .

However, if tenants by the entireties divorce, thereby dissolving the tenancy by the entireties, the mortgagee will have a right to judicial partition by sale, enabling the mortgagee to realize on its security interest. For example, in V.R.W., Inc. v. Klein, 68 N.Y.2d 560, the mortgagee obtained an interest in entireties property that was effective only against the husband. The husband then defaulted on the loan secured by the mortgage, and following a foreclosure action, the parties divorced. The court reasoned that when the parties divorced, the tenancy by the entireties dissolved and became a tenancy in common. Further, the court noted, the mortgagee had acquired the husband's interest in the tenancy in common only and not the wife's interest, because the mortgage was effective only as to the husband (the wife's signature, as it turned out, was forged). Finding that “the grantee or foreclosing mortgagee ' steps into the shoes of the grantor or mortgagor, “the court held that the mortgagee was now in the shoes of the former husband/mortgagor, who was now a tenant in common. As a result, the mortgagee could now successfully bring an action to partition the property. Id. at 565.

But even after divorce, the mortgagee's right to partition is not absolute; if the court finds that a divorce judgment or a separation agreement gives either spouse a right to exclusive occupancy for a fixed period of time after the divorce, the mortgagee has no right to partition during that fixed period. For example, in Solomon v. Barth, 135 Misc.2d 574, the husband and wife, prior to their divorce, were tenants by the entireties. The couple entered into a separation agreement by which the wife was entitled to exclusive occupancy of the property “until such time as the youngest child of the marriage becomes emancipated.” Id. at 575. After the divorce, the husband filed for bankruptcy and his interest in the property was conveyed to a bankruptcy creditor. The bankruptcy creditor then sought to compel partition of the property, though the period of exclusive occupancy in the wife had not expired. The court held that even though the bankruptcy creditor had no knowledge of the exclusive occupancy arrangement at the time she obtained her interest in the property, she was still bound by it. Invoking V.R.W. and principles of equity, the court stated that since the husband could not compel partition, neither could his transferee.

By contrast, where a divorce judgment is silent as to the duration of the exclusive occupancy, courts deem the right of exclusive occupancy to be limited to a “reasonable duration,” absent an express or implied agreement to the contrary. For instance, in Pando v. Tapia, 79 A.D.3d 993, as in Solomon, upon divorce, the wife was awarded exclusive occupancy of tenancy by the entireties property. However, because, unlike Solomon, the wife's right to exclusive occupancy was not limited in duration, the court held that the wife's right “must be deemed limited to a reasonable duration.” Id. at 994-95.Ultimately, the court held that 30 years of exclusive occupancy, which had already passed, was reasonable. Similarly, in Luvera v. Luvera, 119 A.D.2d 810, 812 ,the court upheld an even shorter period of exclusive occupancy as reasonable ' 15 years ' where the divorce judgment granted the wife “exclusive use and occupancy of the marital premises 'until such time as same shall be sold.'” Id. at 810. The court found “until such time as same shall be sold” to be an indefinite period. Further, it determined that 15 years was reasonable because the wife's children with her former husband were over 18 years old, and the wife had remarried and was residing in the former marital residence with her current husband.

Reimbursement for Advances

Bank of America v. Oneonta, L.P.

NYLJ 7/30/12

AppDiv, Third Dept.

(Opinion by McCarthy, J.)

On mortgagee's motion to confirm a referee's report, mortgagee appealed from Supreme Court's order denying reimbursement for advances made by the mortgagee after appointment of a receiver. The Appellate Division modified to grant mortgagee's request for reimbursement of monies paid for taxes and insurance, but otherwise affirmed, holding that Supreme Court had not abused its discretion.

The mortgage agreement expressly permitted mortgagee to make any payments or pay any actions required under the mortgage if mortgagor were to default, and the mortgage expressly required mortgagor to pay taxes and to maintain insurance on the premises. Another provision permitted mortgagee to enter the premises to conduct an environmental assessment and an appraisal after default by the mortgagor, with those costs to become part of the debt owed under the mortgage. When mortgagor defaulted, mortgagee defaulted and sought appointment of a receiver. The court appointed a receiver, but after appointment of the receiver, mortgagee spent a total of $112,185.42 on a number of items related to the property, including payment of taxes and insurance, and payment for environmental assessments, appraisal reports, and marketing commissions to a real estate marketing company. When the property was sold at a foreclosure sale, the sale brought a surplus. Out of the surplus, the referee allowed the mortgagee all of the expenses incurred by the mortgagee. When mortgagee sought to confirm the report, Supreme Court disallowed the $112,185.42 because the mortgagee was not authorized to make advances after appointment of a receiver. On reargument, Supreme Court allowed expenses for taxes and insurance, but without interest. Mortgagee appealed.

In modifying, the Appellate Division noted that the receiver should have paid taxes and insurance, and because these expenses were necessary, mortgagee was entitled to reimbursement with interest. As to the other expenses, however, the court noted that once the receiver was appointed, the mortgagee no longer had authority to take even those actions authorized by the mortgage instrument. The court acknowledged that many of the expenses mortgagee incurred were related to maximizing bids at the foreclosure sale, but nevertheless indicated that the prudent course for the mortgagee would have been to obtain prior judicial approval for making those expenditures. Absent prior approval, Supreme Court had discretion to authorize reimbursement, and the court's decision not to authorize reimbursement did not constitute an abuse of discretion.

Title Insurer Not Liable For Theft

Fidelity National Title Insurance Co. v. Cole Taylor Bank

NYLJ 7/17/12, p. 21, col. 3

U.S. Dist. Ct., SDNY

(Cedarbaum, J.)

In title insurer's action for a declaratory judgment that title insurance policies were never issued in connection with mortgage refinancing, both the title insurer and the mortgage lender agreed to try the case on stipulated facts. The court granted relief to the title insurer, holding that the settlement agent who absconded with funds was not the agent of the title insurer.

Mortgagee bank approved a mortgage loan for mortgagors, who were to use the proceeds to refinance an existing mortgage. The bank sought and obtained a title insurance commitment from Johns and Lee, which advertised itself as a “Full Service Title Company and Settlement Agent.” Johns and Lee had entered into an Agency Agreement with Fidelity National Title to serve as a policy issuing agent. On Oct. 4, 2010, mortgagee bank wired $219,169.48 to the bank account of Johns and Lee for the purpose of satisfying the outstanding mortgages. Johns and Lee's principal stole the funds for personal use. She did not pay mortgage recording fees, nor did she pay Fidelity the premium due for its title insurance policy, nor did she record the mortgagee bank's mortgage. When mortgagee bank discovered that the prior mortgages had not been satisfied, the bank wrote to Fidelity demanding full coverage for its losses. Fidelity contended that it was not liable, and brought this declaratory judgment action.

In granting declaratory relief to Fidelity, the court relied on testimony by the bank's own expert to establish that the bank should not reasonably believe that Johns and Lee was acting as Fidelity's agent when it accepted money as settlement agent. The court rejected the bank's argument that Johns and Lee was clothed with apparent authority to act on Fidelity's behalf in accepting the money. The court concluded that no title policies were issued, and that Fidelity was not therefore liable for any losses.