Real Property Law

AppDiv, Second Dept.

(Opinion by Chambers, J.)

In an action by a former joint tenant for a judgment declaring that a mortgage executed by a deceased joint tenant is void, mortgagee bank appealed from Supreme Court's grant of summary judgment to the former joint tenant. The Appellate Division affirmed, holding that one joint tenant's grant of a mortgage does not sever the joint tenancy.

In 1999, Smith, then the owner of the subject property, conveyed the property to herself and her boyfriend Hassid as joint tenants with right of survivorship. The deed was properly recorded. In 2006, Hassid borrowed $300,000 from mortgagee bank and, without Smith's knowledge, executed a mortgage to secure the loan. The mortgage was properly recorded. In 2009, after Hassid died, mortgagee bank declared the mortgage in default, and Smith brought this action to declare the mortgage void. Supreme Court granted summary judgment to Smith, and the bank appealed.

In affirming, the Appellate Division held that execution of a mortgage by one joint tenant does not sever the joint tenancy. As a result, until Hassid's death, he was still a joint tenant with Smith, and when Hassid died, his interest in the property automatically passed to Smith. The court emphasized that New York is a “lien theory” state, not a “title theory” state, and concluded that Hassid's grant of a lien to the bank did not sever any of the four unities. As a result, the mortgage ceased to exist at Hassid's death.

COMMENT

Although no prior case has decided the issue directly, a number of New York cases have treated as established law the principle that when only one tenant by the entirety has signed a mortgage, the mortgagee loses its security interest when mortgagor predeceases the non-mortgaging spouse. Thus, in

V.R.W., Inc. v. Klein, where the issue was whether a mortgagor's rights are affected by a divorce between tenants by the entirety, the court indicated that if mortgagor predeceases the non-mortgaging spouse, the mortgagee is left with no interest in the property at all. 68 N.Y.2d 560, 566-67 (1986). However, if mortgagor survives the non-mortgaging spouse, mortgagee's interest becomes an “unconditional mortgage on the entire fee” of the property, and mortgagee can recover its interest. Id. at 567.

Though a mortgagee may foreclose on a living tenant by the entirety's interest upon his or her default, the mortgagee may be unable to recover the market value of the interest. When only one tenant by the entirety signs a mortgage, and the mortgagor spouse is still alive, the mortgagee can only foreclose on the mortgaging spouse's interest. For example, in

Hiles v. Fisher, the Court of Appeals reversed a Fourth Department judgment that a foreclosure sale purchaser acquired a right to possession of the whole property even though the wife did not sign the mortgage. 144 N.Y. 306 (1895). The court held that a purchaser of a defaulting tenant by the entirety's interest acquires a tenancy in common with the mortgagor's spouse, subject to the non-mortgaging spouse's right of survivorship. Id. at 316. A purchaser of a tenant by the entirety's interest cannot maintain an action of partition against a remaining tenant by the entirety. RPAPL Section 901, which explicitly authorizes partition actions by tenants in common and joint tenants, does not mention tenants by the entirety at all, and case law establishes that in the absence of statutory authorization, a tenant by the entirety may not obtain partition. Vollaro v. Vollaro, 144 AppDiv 242 (affirming dismissal of partition action by tenant by the entirety As a result, bidders are unlikely to bid on a tenancy by the entirety interest in a foreclosure sale, forcing the mortgagee to accept a sale price less than market value of the interest.

By contrast, a mortgagee may be able to recover the market value of a joint tenant's interest upon foreclosure. A foreclosure sale of a joint tenant's interest severs the joint tenancy, creating a tenancy in common between the purchaser and remaining tenant, subject to the remaining tenant's right of survivorship.

See Real Prop L section 240-c (“delivery of a deed that conveys legal title to the severing joint tenant's interest to a third person” operates to sever a joint tenancy). Following foreclosure, a purchaser of a joint tenant's interest may maintain an action of partition against the remaining joint tenant. AlsoSee NY RPAPL
' 901(1). Since purchaser acquires the full value of mortgagor's interest through partition, a mortgagee may recover its interest in property held as a joint tenancy when a living mortgagor defaults.

'

Fraudulent Concealment

Rojas v. Paine

NYLJ 12/14/12, p. 26, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action by purchaser to recover damages for fraud, and to obtain specific performance of a contract for sale of real property, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that purchaser's allegations did not make out a claim of fraudulent concealment, and that any claim for specific performance did not survive the closing.

Purchasers contracted to buy the subject single-family house in April 2005. The house was located on a parcel designated as lot 8. At the June 6 closing, sellers delivered a deed reciting that the property conveyed was the same property that had been transferred to the sellers by two separate deeds recorded in March 2005. In fact, however, the property description in the deed only contained the property conveyed in one of the two deeds recorded in March. Two years later, purchaser brought this action contending that sellers and their lawyers had intentionally concealed the fact that the property had been subdivided by the two deeds recorded in March 2005, and also sought specific performance of the alleged contract to convey all of parcel 8. Supreme Court dismissed the complaint, and purchasers appealed.

In affirming, the Appellate Division first held that because the subdivision was a matter of public record, not within the exclusive knowledge of the sellers, failure to disclose could not constitute active concealment, and therefore could not serve as the foundation for a fraud action. The court then turned to the specific performance claim, and held that because the sale of the property that had been the subject of the contract had already closed, any claims arising out of the contract was extinguished by the doctrine of merger. As a result, purchasers could not obtain specific performance.

'

Improper Recording

Weill v. East Sunset Park Realty, LLC

NYLJ 12/14/12, p. 30, cols. 2, 3

AppDiv.

(two separate memorandum opinions)

In an action to foreclose a mortgage, plaintiff mortgagee appealed from Supreme Court's order granting summary judgment to subsequent purchasers who claimed to be free of the mortgage because it was improperly recorded. Mortgagee's title insurers separately appealed from the same Supreme Court's order dismissing title insurer's cross claim against the City of New York for negligence in improperly recording the mortgage. The Appellate Division affirmed the dismissal against the city, but reversed the grant of summary judgment to subsequent purchasers, concluding that questions of fact remained about the priority of mortgagee's interest.

Mortgagee's predecessor in interest had hired title insurers to record the mortgage. Title insurer did so, but apparently recorded it under the incorrect lot number in the Office of the City Register. As a result, when mortgagee brought this foreclosure action, subsequent purchasers contended that they were not bound by the mortgage, because they had no actual notice of the mortgage, and had no constructive notice because the mortgage was improperly recorded. Mortgagee then served an amended complaint adding the title insurer as defendant, and the title insurer asserted a cross-claim against the City of New York, contending that the misindexing of the mortgage was the product of the city's negligence. Supreme Court dismissed mortgagee's complaint against subsequent purchasers, and also dismissed title insurer's cross claim against the city. Mortgagee appealed from the dismissal, and the title insurer appealed from dismissal of its cross claim.

In reversing dismissal of the complaint, the court concluded that questions of fact remained about whether mortgagee enjoyed priority over the subsequent purchasers. The court then affirmed the dismissal of the title insurer's cross-claim against the city, holding that government ministerial action can only give rise to liability if the government owed a special duty to the plaintiff, apart from its duty to the public at large. Because the city had no special duty to the title insurer, the insurer's claim against the city could not stand. The court declined to consider the title insurer's argument that the city had a special duty to mortgagee because the title insurer had raised that argument for the first time on appeal.

COMMENT

A municipality is liable to a party who submits a deed or mortgage for recording if the party suffers harm as a result of a recording mistake made by a recording official. For example, in

Baccari v. DeSanti, 70 A.D.2d 198, the court, although denying a mortgagee's summary judgment motion in an action against the county, held that the mortgagee would be entitled to recover from the county if the
mortgagee could demonstrate that the county's misindexing harmed the mortgagee. A company hired by the county produced an erroneous index, which incorrectly identified the town in which the mortgaged property was located. Subsequent purchasers bought the property, and contended that they took free of the mortgage. When the mortgagee sought relief against both the municipality, the court indicated that the mortgagee was entitled to recover unless the county could prove that the subsequent purchaser and subsequent mortgagee acquired the property with actual knowledge of the misindexed mortgage. Id. at 204. In that event,, the county would not be liable because the lien of the mortgage would not have been extinguished upon the sale of the encumbered property, and the mortgagee would have a remedy against the subsequent purchaser. Id. at 201.

Similarly, in

American Financial Corp. of Tampa v. City of Rochester, 2002 N.Y. Slip Op. 50420(U), 2, the court held that a mortgagee whose mortgage was improperly recorded could maintain an action for damages against the county clerk and city. An assignee of a mortgage sought to set aside a tax foreclosure deed when the city did not provide the assignee with not receive notice of the tax foreclosure proceeding because the city had improperly indexed the mortgage. Id. at 1. The court held that a proceeding to set aside the tax foreclosure deed would not lie, but that if the mortgagee had presented a properly executed deed, evidenced by a receipt from filing the deed with the county clerk, the county and city would be liable for mortgagee's losses. Id. at 2. By contrast, where the misindexing is due to the mortgagee's own error, the municipality bears no liability. Thus, in O'Neill v. Lola Realty Corp., 264 A.D.2d 60, where a mortgagee filed a mortgage with the recording officer that incorrectly described the property subject to the lien, the mortgagee was not entitled to recover.

A municipality is not liable for misindexing to a member of the public who is not a party to the deed or mortgage. In

Elbadawi v. City of New York, 32 Misc.3d 1241(A), 2011 NY Slip Op 51655(U), 3, the court granted the municipality's motion for summary judgment in an action by a tort victim who sought damages from the city for losses suffered when the victim brought suit against a party who no longer owned property on which the victim had been injured. Those owners had conveyed the property, but the subsequent purchaser's deed had been misrecorded by the City Register's Office. Id. The court held that the city did not owe the tort victim a duty to record deeds properly. Id. at 3.

'

Mortgage Priorities

Congregation Beth Medrosh of Monsey, Inc. v. Rolling Acres Chestnut Ridge, LLC

NYLJ 12/14/12, p. 36, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, senior mortgagee Empire appealed from a Supreme Court order awarding summary judgment to junior mortgagee, the Congregation. The Appellate Division modified, holding that Empire enjoyed priority to the extent of a $1 million mortgage executed and recorded before the Congregation extended its mortgage loan, but not with respect to a mortgage executed after recordation of the Congregation's mortgage.

In July 2005, FKF3 recorded a $1 million mortgage granted by mortgagor Rolling Acres. Later that year, mortgagor executed a $1.2 million mortgage note to the Congregation. The mortgage was recorded in November 2005. In March 2007, FKF3 assigned its mortgage to Empire, and two days later, mortgagor delivered a new mortgage to Empire for $2,425,000. Empire then entered into an agreement consolidating its two mortgages for a total lien of $3,425,000. Empire contends that it entered into these arrangements in reliance on representations of its title insurer, supported by a supposed letter from the Congregation's treasurer, that the Congregation's mortgage had been satisfied. No satisfaction was ever recorded, and Empire recorded its consolidated mortgage on May 25, 2007. In May 2009, Empire brought an action to foreclose its mortgage, and ultimately accepted a deed in lieu of foreclosure. Then, in January 2012, the Congregation brought the instant action to foreclose its mortgage, joining Empire as a defendant and seeking a declaration that its mortgage was superior to Empire's. Supreme Court awarded summary judgment to the Congregation, and Empire appealed.

In modifying, the Appellate Division first agreed with Supreme Court that the Congregation's mortgage enjoyed priority over Empire's $2,425,000 mortgage. Because the Congregation's mortgage was recorded when Empire extended the mortgage, and no satisfaction had been recorded, Empire had constructive notice of the Congregation's mortgage. But the court held then rejected the Congregation's argument that Empire's prior $1 million mortgage became merged with its title, and was therefore extinguished, when Empire took a deed in lieu of foreclosure. The Appellate Division noted that the Congregation had extended its mortgage with knowledge that the $1 million mortgage enjoyed priority, and emphasized that the Congregation would not be unjustly injured by allowing Empire to maintain priority with respect to that mortgage. Hence, the court awarded summary judgment to Empire declaring that the $1 million assigned mortgage enjoyed priority over the Congregation's mortgage.

Joint Tenancy

Smith v. Bank of America

NYLJ 1/2/13, p. 17, col. 1

AppDiv, Second Dept.

(Opinion by Chambers, J.)

In an action by a former joint tenant for a judgment declaring that a mortgage executed by a deceased joint tenant is void, mortgagee bank appealed from Supreme Court's grant of summary judgment to the former joint tenant. The Appellate Division affirmed, holding that one joint tenant's grant of a mortgage does not sever the joint tenancy.

In 1999, Smith, then the owner of the subject property, conveyed the property to herself and her boyfriend Hassid as joint tenants with right of survivorship. The deed was properly recorded. In 2006, Hassid borrowed $300,000 from mortgagee bank and, without Smith's knowledge, executed a mortgage to secure the loan. The mortgage was properly recorded. In 2009, after Hassid died, mortgagee bank declared the mortgage in default, and Smith brought this action to declare the mortgage void. Supreme Court granted summary judgment to Smith, and the bank appealed.

In affirming, the Appellate Division held that execution of a mortgage by one joint tenant does not sever the joint tenancy. As a result, until Hassid's death, he was still a joint tenant with Smith, and when Hassid died, his interest in the property automatically passed to Smith. The court emphasized that New York is a “lien theory” state, not a “title theory” state, and concluded that Hassid's grant of a lien to the bank did not sever any of the four unities. As a result, the mortgage ceased to exist at Hassid's death.

COMMENT

Although no prior case has decided the issue directly, a number of New York cases have treated as established law the principle that when only one tenant by the entirety has signed a mortgage, the mortgagee loses its security interest when mortgagor predeceases the non-mortgaging spouse. Thus, in

V.R.W., Inc. v. Klein, where the issue was whether a mortgagor's rights are affected by a divorce between tenants by the entirety, the court indicated that if mortgagor predeceases the non-mortgaging spouse, the mortgagee is left with no interest in the property at all. 68 N.Y.2d 560, 566-67 (1986). However, if mortgagor survives the non-mortgaging spouse, mortgagee's interest becomes an “unconditional mortgage on the entire fee” of the property, and mortgagee can recover its interest. Id. at 567.

Though a mortgagee may foreclose on a living tenant by the entirety's interest upon his or her default, the mortgagee may be unable to recover the market value of the interest. When only one tenant by the entirety signs a mortgage, and the mortgagor spouse is still alive, the mortgagee can only foreclose on the mortgaging spouse's interest. For example, in

Hiles v. Fisher, the Court of Appeals reversed a Fourth Department judgment that a foreclosure sale purchaser acquired a right to possession of the whole property even though the wife did not sign the mortgage. 144 N.Y. 306 (1895). The court held that a purchaser of a defaulting tenant by the entirety's interest acquires a tenancy in common with the mortgagor's spouse, subject to the non-mortgaging spouse's right of survivorship. Id. at 316. A purchaser of a tenant by the entirety's interest cannot maintain an action of partition against a remaining tenant by the entirety. RPAPL Section 901, which explicitly authorizes partition actions by tenants in common and joint tenants, does not mention tenants by the entirety at all, and case law establishes that in the absence of statutory authorization, a tenant by the entirety may not obtain partition. Vollaro v. Vollaro, 144 AppDiv 242 (affirming dismissal of partition action by tenant by the entirety As a result, bidders are unlikely to bid on a tenancy by the entirety interest in a foreclosure sale, forcing the mortgagee to accept a sale price less than market value of the interest.

By contrast, a mortgagee may be able to recover the market value of a joint tenant's interest upon foreclosure. A foreclosure sale of a joint tenant's interest severs the joint tenancy, creating a tenancy in common between the purchaser and remaining tenant, subject to the remaining tenant's right of survivorship.

See Real Prop L section 240-c (“delivery of a deed that conveys legal title to the severing joint tenant's interest to a third person” operates to sever a joint tenancy). Following foreclosure, a purchaser of a joint tenant's interest may maintain an action of partition against the remaining joint tenant. AlsoSee NY RPAPL
' 901(1). Since purchaser acquires the full value of mortgagor's interest through partition, a mortgagee may recover its interest in property held as a joint tenancy when a living mortgagor defaults.

'

Fraudulent Concealment

Rojas v. Paine

NYLJ 12/14/12, p. 26, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action by purchaser to recover damages for fraud, and to obtain specific performance of a contract for sale of real property, purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that purchaser's allegations did not make out a claim of fraudulent concealment, and that any claim for specific performance did not survive the closing.

Purchasers contracted to buy the subject single-family house in April 2005. The house was located on a parcel designated as lot 8. At the June 6 closing, sellers delivered a deed reciting that the property conveyed was the same property that had been transferred to the sellers by two separate deeds recorded in March 2005. In fact, however, the property description in the deed only contained the property conveyed in one of the two deeds recorded in March. Two years later, purchaser brought this action contending that sellers and their lawyers had intentionally concealed the fact that the property had been subdivided by the two deeds recorded in March 2005, and also sought specific performance of the alleged contract to convey all of parcel 8. Supreme Court dismissed the complaint, and purchasers appealed.

In affirming, the Appellate Division first held that because the subdivision was a matter of public record, not within the exclusive knowledge of the sellers, failure to disclose could not constitute active concealment, and therefore could not serve as the foundation for a fraud action. The court then turned to the specific performance claim, and held that because the sale of the property that had been the subject of the contract had already closed, any claims arising out of the contract was extinguished by the doctrine of merger. As a result, purchasers could not obtain specific performance.

'

Improper Recording

Weill v. East Sunset Park Realty, LLC

NYLJ 12/14/12, p. 30, cols. 2, 3

AppDiv.

(two separate memorandum opinions)

In an action to foreclose a mortgage, plaintiff mortgagee appealed from Supreme Court's order granting summary judgment to subsequent purchasers who claimed to be free of the mortgage because it was improperly recorded. Mortgagee's title insurers separately appealed from the same Supreme Court's order dismissing title insurer's cross claim against the City of New York for negligence in improperly recording the mortgage. The Appellate Division affirmed the dismissal against the city, but reversed the grant of summary judgment to subsequent purchasers, concluding that questions of fact remained about the priority of mortgagee's interest.

Mortgagee's predecessor in interest had hired title insurers to record the mortgage. Title insurer did so, but apparently recorded it under the incorrect lot number in the Office of the City Register. As a result, when mortgagee brought this foreclosure action, subsequent purchasers contended that they were not bound by the mortgage, because they had no actual notice of the mortgage, and had no constructive notice because the mortgage was improperly recorded. Mortgagee then served an amended complaint adding the title insurer as defendant, and the title insurer asserted a cross-claim against the City of New York, contending that the misindexing of the mortgage was the product of the city's negligence. Supreme Court dismissed mortgagee's complaint against subsequent purchasers, and also dismissed title insurer's cross claim against the city. Mortgagee appealed from the dismissal, and the title insurer appealed from dismissal of its cross claim.

In reversing dismissal of the complaint, the court concluded that questions of fact remained about whether mortgagee enjoyed priority over the subsequent purchasers. The court then affirmed the dismissal of the title insurer's cross-claim against the city, holding that government ministerial action can only give rise to liability if the government owed a special duty to the plaintiff, apart from its duty to the public at large. Because the city had no special duty to the title insurer, the insurer's claim against the city could not stand. The court declined to consider the title insurer's argument that the city had a special duty to mortgagee because the title insurer had raised that argument for the first time on appeal.

COMMENT

A municipality is liable to a party who submits a deed or mortgage for recording if the party suffers harm as a result of a recording mistake made by a recording official. For example, in

Baccari v. DeSanti, 70 A.D.2d 198, the court, although denying a mortgagee's summary judgment motion in an action against the county, held that the mortgagee would be entitled to recover from the county if the
mortgagee could demonstrate that the county's misindexing harmed the mortgagee. A company hired by the county produced an erroneous index, which incorrectly identified the town in which the mortgaged property was located. Subsequent purchasers bought the property, and contended that they took free of the mortgage. When the mortgagee sought relief against both the municipality, the court indicated that the mortgagee was entitled to recover unless the county could prove that the subsequent purchaser and subsequent mortgagee acquired the property with actual knowledge of the misindexed mortgage. Id. at 204. In that event,, the county would not be liable because the lien of the mortgage would not have been extinguished upon the sale of the encumbered property, and the mortgagee would have a remedy against the subsequent purchaser. Id. at 201.

Similarly, in

American Financial Corp. of Tampa v. City of Rochester, 2002 N.Y. Slip Op. 50420(U), 2, the court held that a mortgagee whose mortgage was improperly recorded could maintain an action for damages against the county clerk and city. An assignee of a mortgage sought to set aside a tax foreclosure deed when the city did not provide the assignee with not receive notice of the tax foreclosure proceeding because the city had improperly indexed the mortgage. Id. at 1. The court held that a proceeding to set aside the tax foreclosure deed would not lie, but that if the mortgagee had presented a properly executed deed, evidenced by a receipt from filing the deed with the county clerk, the county and city would be liable for mortgagee's losses. Id. at 2. By contrast, where the misindexing is due to the mortgagee's own error, the municipality bears no liability. Thus, in O'Neill v. Lola Realty Corp., 264 A.D.2d 60, where a mortgagee filed a mortgage with the recording officer that incorrectly described the property subject to the lien, the mortgagee was not entitled to recover.

A municipality is not liable for misindexing to a member of the public who is not a party to the deed or mortgage. In

Elbadawi v. City of New York, 32 Misc.3d 1241(A), 2011 NY Slip Op 51655(U), 3, the court granted the municipality's motion for summary judgment in an action by a tort victim who sought damages from the city for losses suffered when the victim brought suit against a party who no longer owned property on which the victim had been injured. Those owners had conveyed the property, but the subsequent purchaser's deed had been misrecorded by the City Register's Office. Id. The court held that the city did not owe the tort victim a duty to record deeds properly. Id. at 3.

'

Mortgage Priorities

Congregation Beth Medrosh of Monsey, Inc. v. Rolling Acres Chestnut Ridge, LLC

NYLJ 12/14/12, p. 36, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, senior mortgagee Empire appealed from a Supreme Court order awarding summary judgment to junior mortgagee, the Congregation. The Appellate Division modified, holding that Empire enjoyed priority to the extent of a $1 million mortgage executed and recorded before the Congregation extended its mortgage loan, but not with respect to a mortgage executed after recordation of the Congregation's mortgage.

In July 2005, FKF3 recorded a $1 million mortgage granted by mortgagor Rolling Acres. Later that year, mortgagor executed a $1.2 million mortgage note to the Congregation. The mortgage was recorded in November 2005. In March 2007, FKF3 assigned its mortgage to Empire, and two days later, mortgagor delivered a new mortgage to Empire for $2,425,000. Empire then entered into an agreement consolidating its two mortgages for a total lien of $3,425,000. Empire contends that it entered into these arrangements in reliance on representations of its title insurer, supported by a supposed letter from the Congregation's treasurer, that the Congregation's mortgage had been satisfied. No satisfaction was ever recorded, and Empire recorded its consolidated mortgage on May 25, 2007. In May 2009, Empire brought an action to foreclose its mortgage, and ultimately accepted a deed in lieu of foreclosure. Then, in January 2012, the Congregation brought the instant action to foreclose its mortgage, joining Empire as a defendant and seeking a declaration that its mortgage was superior to Empire's. Supreme Court awarded summary judgment to the Congregation, and Empire appealed.

In modifying, the Appellate Division first agreed with Supreme Court that the Congregation's mortgage enjoyed priority over Empire's $2,425,000 mortgage. Because the Congregation's mortgage was recorded when Empire extended the mortgage, and no satisfaction had been recorded, Empire had constructive notice of the Congregation's mortgage. But the court held then rejected the Congregation's argument that Empire's prior $1 million mortgage became merged with its title, and was therefore extinguished, when Empire took a deed in lieu of foreclosure. The Appellate Division noted that the Congregation had extended its mortgage with knowledge that the $1 million mortgage enjoyed priority, and emphasized that the Congregation would not be unjustly injured by allowing Empire to maintain priority with respect to that mortgage. Hence, the court awarded summary judgment to Empire declaring that the $1 million assigned mortgage enjoyed priority over the Congregation's mortgage.