Real Property Law

Supreme Ct., Nassau Cty.

(Diamond, J.)

In an action by home purchaser against sellers, mortgage lender and title insurer, the latter moved to dismiss the complaint, alleging that insurer was liable because purchaser's title was unmarketable. The court did dismiss the complaint, holding that the existence of an illegal two-family dwelling on the parcel did not make title unmarketable.

Purchaser contracted to buy the subject premises, which are improved with a two-family house.

Apparently, a variance permitting use and occupancy as a two-family home had expired, without purchaser's knowledge, before purchaser closed on the property. Purchaser had sought to obtain a title insurance policy. Before issuing the policy, the insurer had an issuing agent conduct a title search for the insurer's benefit. Title insurer then issued a standard ALTA owner's policy. When purchaser learned that the house did not conform to the zoning ordinance, purchaser brought this action.

In dismissing the claim against the title insurer, the court held that a zoning code violation relates to the manner in which property can be used, not to the marketability of title. Because the defect included use and occupancy of the property, and the policy explicitly excluded such defects, title insurer was entitled to dismissal of the complaint.

COMMENT

The existence of a zoning violation at the time of contract and/or conveyance does not render the property's title unmarketable. Thus, in Voorheesville Rod & Gun Club v. E.W. Tompkins Co., 82 N.Y.2d 564, the Court of Appeals held that purchaser was not entitled to require seller to obtain subdivision approval prior to closing even though the sale covered only part of seller's larger parcel, and the division of the larger parcel triggered the town's subdivision approval requirement. The court noted that purchaser had agreed to buy the parcel subject to zoning laws “provided that this does not render the title to the premises unmarketable,” and went on to hold' that the seller's refusal to obtain subdivision approval did not make the title unmarketable. Dismissing the purchaser's claim, the court stated that marketability of title is concerned with “the right to unencumbered ownership and possession, not with the legal public regulation of the use of the property.” Id.

Because they do not render title unmarketable, zoning and other regulatory violations that are not expressly covered under the title insurance policy will not result in
liability on title insurers for damages claimed by purchasers. Thus, in Logan v. Barretto, 251 A.D.2d 552, the court dismissed the purchaser's claim for breach of contract against the title insurer when the title insurer failed to disclose sanitary code violations in the title report prior to the purchase of the property. The court held that the title insurer's standard policy, which was silent on the issue of zoning ordinances, covered only defects and unmarketability of the title. Id. The title insurer's freedom from liability is even more clear when zoning violations are expressly excluded from coverage. In Wolf v. Commonwealth Land Title Insurance Co., 180 Misc.2d 307, 690 N.Y.S.2d 880, the court granted the title insurer's motion for summary judgment when purchaser brought a claim for the cost of removing a deck/extension that violated the certificate of occupancy and/or zoning ordinances. The court held that because a zoning violation is not an encumbrance on the title, and the title insurance policy expressly excluded from its coverage loss from zoning ordinances, the damages did not fall within the scope of the policy. Id.

However, sellers are liable to purchasers for breach of contract when sellers, in the contract, warrant that the premises are free from zoning violations, but in fact the premises do violate the applicable zoning ordinance. For example, in Pamerqua Realty Corp. v. Dollar Service Corp., 93 A.D.2d 249,' the court held that purchasers were entitled to return of their down payment where the seller had refused to obtain necessary municipal approval for a division of the property, despite a provision in the sale contract stating that the premises are to be conveyed subject to “zoning regulations and ordinances of the city ' which are not violated by existing structures.”

'

Entitlement to Partition May Be Rebutted

Diaz v. Alcantara

NYLJ 2/20/13, p. 21, col. 1

Supreme Ct., N.Y. Cty.

(Kenney, J.)

In an action for partition and sale of a residential building, co-tenant Diaz sought summary judgment on his claim for division and sale of the building. The court denied Diaz's motion for a judgment of partition, struck co-tenant Alcantara's affirmative defenses and counterclaims, and referred the matter to a referee to hear and report on the parties' rights and interests.

Diaz and Alcantara, who were then dating, purchased the subject building in 2002. They allegedly made a down payment of $101,000, and took out a mortgage for the rest of the purchase price. The parties dispute whether the price was $360,000 or $465,000, and dispute how much each contributed to the purchase price. Because Alcantara did not have a reliable credit history, a friend joined with Diaz to seek the mortgage, with an understanding (not disputed by either party) that the friend would convey her interest to Alcantara. The couple broke up in 2004, and since that time, Alcantara has lived in the building (which has two other apartments), has paid for most mortgage and maintenance expenses, and has collected all rent. The parties refinanced the mortgage in 2007. In this action, Diaz sought partition and sale because he no longer wanted to own the property with Alcantara.'

The court first struck Alcantara's affirmative defenses and dismissed her counterclaims. But the court then held that Alcantara had rebutted Diaz's prima facie entitlement to partition by her undisputed claims that she has been the sole caretaker for the past 11 years. The court then indicated that Diaz was entitled to an accounting which would consider the parties' actual financial and non-financial contributions. The court appointed a referee to determine the accounting and to recommend whether partition and sale is the proper remedy for the dispute.

COMMENT

Although Real Property Actions and Proceedings Law ' 901 states that a “person holding and in possession of real property as joint tenant or tenant in common ' may maintain an action for the partition of the property,” courts will not grant partition where there is an agreement which gives, or a divorce decree which awards, a non-partitioning joint tenant or tenant in common “exclusive possession” or an “exclusive right to occupy” the property. For example, in Petty v. Petty, 79 A.D.2d 679, 679-80, the court held that where the separation agreement contained the phrases “exclusive possession” and “exclusive right to occupy,” it was clear that the manifested intent of the parties was to provide the wife with the right to occupy the premises to the exclusion of her former husband and tenant in common. The agreement, therefore, precluded the former husband from compelling partition. Similarly, in Ripp v. Ripp, 38 A.D.2d 65, 70-71, where the divorce decree awarded the defendant wife sole and exclusive possession of the marital home, the court affirmed the lower court's dismissal of the partition action; however, the court noted that the plaintiff husband could move for modification of the judgment of divorce granting him the right to institute an action for partition.

Before a court will consider the merits of an action for partition, the parties must prove their respective interests in the property.

In Goldberger v. Rudnicki, 94 A.D.3d 1048, 1050, the plaintiff brought an action for partition and sale of one of three parcels. The court reversed an order granting plaintiff's motion for summary judgment in favor of partition because the issues of the respective interests, rights, and share in the property remained unresolved. Id.

Although a number of cases, particularly in the Second Department, assert that the right to partition is not absolute, and is always subject to the equities between the parties, almost all of those cases in fact find that the equities favor partition. See, e.g. Graffeo v. Paciello, 46 A.D.2d 613, Arata v. Behling, 57 A.D.3d 925, 926, in which the court upheld the denial of the plaintiff's motion for summary judgment, is a rare exception. Francis Arata, plaintiff's father, owned the subject property as joint tenant with defendant. Francis conveyed his right, title, and interest to plaintiff, while reserving a life estate, which was later released to plaintiff as well. Without citing specific facts, the court indicated that trial was necessary to determine whether the equities favored partition. In Stressler v. Stressler, the Second Department went further, and dismissed a former husband's action for partition against his co-tenant wife because the parties' unemancipated son, who was under the age of 21 years, still resided in the subject residence. 193 A.D.2d 728. What is not clear from the brief memorandum in Stressler is whether the court's conclusion rested, at least in part, on its construction of the terms of the divorce decree or stipulation. Sherman v. Sherman, 168 A.D.2d 550 was the only case the court cited for its conclusion that the equities did not favor partition, and in Sherman, the court relied on its construction of a stipulation between divorcing parties.'

'

Constructive Trust Claim Fails for Inadequate Proof of Reliance

Henning v. Henning

NYLJ 2/22/13, p. 25, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to impose a constructive trust on real property, plaintiff appealed from Supreme Court's grant of judgment as a matter of law to defendants. The Appellate Division affirmed, holding that plaintiff had not demonstrated any reliance on the purported promise of defendants, her former in-laws.

When plaintiff and her husband moved into the subject property in 1985, record title was held by the husband's mother. Over the course of time, the husband's parents executed a number of deeds conveying interests in the property to a series of trusts. Husband and wife separated in 2009, and plaintiff wife brought this action to impose a constructive trust on the property. Her complaint alleged that her husband's parents had promised to convey the property to plaintiff and her husband, and that she and the husband had expended considerable funds to maintain and improve the property, all in reliance on the parents' promise. After a non-jury trial, Supreme Court dismissed the complaint, concluding that there was insufficient evidence of a promise to convey, that the evidence presented indicated that the expenses incurred were principally for the benefit of the husband, wife and their children, and that the parents were not unjustly enriched because the value of the improvements did not approach what the husband and wife would have spent on the purchase, upkeep, and maintenance of their own home if they had not been permitted to live rent free in the subject house. Plaintiff wife appealed.

In affirming, the Appellate Division held that plaintiff wife had failed to meet the burden of demonstrating that she had developed an equitable interest in the property through her expenditure of time, money and labor. The court noted that the improvements she made could be considered rent, rather than expenditures made in reliance on the alleged promise to convey. Finally, the court agreed with Supreme Court that the wife had demonstrated no unjust enrichment in light of the parents' failure to seek or receive any rent payments for more than 25 years.

COMMENT

When an occupant seeks to impose a constructive trust against a record owner, the occupant must show detrimental reliance upon a promise made by the record. Sharp v. Kosmalski, 40 N.Y.2d 119. The occupant can show that the expenditures were made in reliance on a promise by demonstrating that' no reasonable occupant would have made the expenditures of time, money or labor but for a promise to convey an interest in the property. Id. Hence, in Washington v. Defense, 149 A.D.2d 697,698 the Appellate Division upheld the imposition of a constructive trust against a record owner where the occupant, who alleged' a promise made by the record owner to put the deed in both of their names, established that she had paid part of the down payment, did all the necessary preparatory work to obtain loans, obtained a loan on her own home to contribute to the cost of construction, invested a gift from her father in the property, and painted, laid tile, and installed the insulation. Likewise, in Lester v. Zimmer, 147 A.D.2d 340,342 the court held that “a premarital transfer of funds for the improvement of realty can form a predicate for the imposition of a constructive trust.” The Appellate Division affirmed a lower court denial of a record owner's motion for summary judgment because the occupant had indicated that she had provided financial support for record owner during the period of construction, contributed over $1,300 to the cost of materials, and actually participated in building the house over a two-year period.

When a reasonable occupant might have been induced to make expenditures by facts other than record owner's promise, courts will not impose a constructive trust. In Matter of Lefton, 160 A.D.2d 702, despite the fact that the occupant-son moved onto the property to take care of his father, the record owner, the court found that the father's wife, who held an interest as a tenant by the entirety, was free to convey the property upon the father's death because the occupant had failed to establish that he would not have contributed his time, money and labor but for a promise to convey an interest in the property. The court observed that the occupant might have made the expenditures “to improve the surroundings in which he and his family lived.” In Marini v. Lombardo, 79 A.D.3d 932, the court also refused to impose a constructive trust where the occupant, record owner's son-in-law, asserted a counterclaim' after the record owner brought an action for ejectment and damages for non-payment of use and occupancy. There, the court held that the occupant failed to establish that the only plausible explanation for the expenditures (addition of a swimming pool, tile work and interior painting) was because a promise had been made by the record owner to convey an interest in the property. Id. at 934-35.'

'

Questions of Fact Preclude Summary Discharge of Mortgage

Beltway Capital, LLC v. Soleil

NYLJ 3/8/13, AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagee's assignee appealed from Supreme Court's refusal to vacate an order discharging the mortgage, and from Supreme Court's cancellation of the mortgagee's notice of pendency. The Appellate Division reversed and reinstated the mortgage and the notice of pendency, noting that questions of fact remained about the bona fide purchaser status of a subsequent purchaser of the property.

In 2007, mortgagee brought this action to foreclose on a mortgage securing a $625,000 loan mortgagee had extended to Soleil. Mortgagee filed a notice of pendency in conjunction with the foreclosure action. Soleil did not appear, and Supreme Court granted mortgagee an order of reference. Then, in 2008, Soleil moved to dismiss the foreclosure action, contending that he had paid off the mortgage.

Because mortgagee did not respond to the motion, Supreme Court granted the motion, cancelled the notice of pendency, and discharged the mortgage. Soleil then sold the property to Hughes, who transferred the property to herself and her husband. At the time of the transfer, they executed a mortgage to Sperry. Mortgagee then assigned the original mortgage to assignee, who moved to vacate the original mortgagee's default in appearing. Assignee also filed a notice of pendency. Then, in 2011, Supreme Court denied assignee's motion to vacate dismissal of the foreclosure action. The court held that although the mortgage might have been erroneously discharged because the mortgage had not, in fact, been paid, the mortgage cannot be reinstated when there has been detrimental reliance on the erroneous discharge be bona fide purchaser or encumbrancers. In this case, Supreme Court held that because Hughes and others had relied on the discharge, assignee was not entitled to vacate the discharge. As a result, Supreme Court vacated the notice of pendency.

In reversing, the Appellate Division noted first that the erroneous discharge was based on Soleil's fraud and misrepresentation that the mortgage loan had been paid. In that circumstance, mortgagee was entitled to have the erroneous discharge set aside' when there has not been detrimental reliance by a bona fide purchaser. In this case, however, only limited discovery had been completed, and it was not clear that Hughes had established that she was a bona fide purchaser. As a result, the court should have vacated the discharge, reinstated the mortgage, and restored the notice of pendency.

COMMENT

A mortgagee is entitled to vacatur of a mistaken discharge of a mortgage where no one has relied on the erroneous recording to his or her detriment. Detrimental reliance occurs when a party' invests in property, by making a purchase, making improvements, or extending a loan, without notice of the mistake. Thus, in Application of Ditta, 221 N.Y.S.2d 34, 35, Special Term declined to reinstate a lien' because one buyer purchased his interest in the property without notice that the lien had mistakenly been discharged. Similarly, in DLJ Mortg. Capital, Inc. v. Windsor, 78 A.D.3d 645, the Second Department refused to vacate a mistaken satisfaction because a subsequent lender who had no notice of the mistake made a loan in reliance on that satisfaction.

A claim of detrimental reliance will not succeed when the person claiming reliance had notice of the mistaken discharge. For example, in Deutsche Bank Trust Co. v. Stathakis, 90 A.D.3d 983, the Second Department rejected a mortgagor's contention that he contracted for renovations to the property in reliance on the bank's mistakenly recorded satisfaction, emphasizing that the bank had moved to vacate the satisfaction over six months before the mortgagor contracted for renovations, providing the mortgagor with sufficient notice of the erroneous satisfaction. Id. at 984. As a result, any reliance was unreasonable.

If no one has relied on the erroneous discharge, the mortgagee is entitled to reinstatement of the old mortgage or replacement with a new equivalent mortgage. For instance, in Citibank, N.A. v. Kenney, 17 A.D.3d 305, the Second Department held that a senior mortgagee that had erroneously executed and recorded a satisfaction of its mortgage was nevertheless entitled to priority over two subsequent mortgages, both of which were executed before the satisfaction was erroneously recorded. Because the subsequent mortgages were executed before the satisfaction, the subsequent mortgagees could not have relied on the erroneous satisfaction. However, if either of the junior mortgagees changed its position without notice of the mistaken discharge, the court would have likely upheld the mistaken satisfaction. Id.

'

Zoning Code Violations Do Not Impair Marketability of Title

Silberger v. Smith

NYLJ 2/13/13, p. 21, col. 1

Supreme Ct., Nassau Cty.

(Diamond, J.)

In an action by home purchaser against sellers, mortgage lender and title insurer, the latter moved to dismiss the complaint, alleging that insurer was liable because purchaser's title was unmarketable. The court did dismiss the complaint, holding that the existence of an illegal two-family dwelling on the parcel did not make title unmarketable.

Purchaser contracted to buy the subject premises, which are improved with a two-family house.

Apparently, a variance permitting use and occupancy as a two-family home had expired, without purchaser's knowledge, before purchaser closed on the property. Purchaser had sought to obtain a title insurance policy. Before issuing the policy, the insurer had an issuing agent conduct a title search for the insurer's benefit. Title insurer then issued a standard ALTA owner's policy. When purchaser learned that the house did not conform to the zoning ordinance, purchaser brought this action.

In dismissing the claim against the title insurer, the court held that a zoning code violation relates to the manner in which property can be used, not to the marketability of title. Because the defect included use and occupancy of the property, and the policy explicitly excluded such defects, title insurer was entitled to dismissal of the complaint.

COMMENT

The existence of a zoning violation at the time of contract and/or conveyance does not render the property's title unmarketable. Thus, in Voorheesville Rod & Gun Club v. E.W. Tompkins Co., 82 N.Y.2d 564, the Court of Appeals held that purchaser was not entitled to require seller to obtain subdivision approval prior to closing even though the sale covered only part of seller's larger parcel, and the division of the larger parcel triggered the town's subdivision approval requirement. The court noted that purchaser had agreed to buy the parcel subject to zoning laws “provided that this does not render the title to the premises unmarketable,” and went on to hold' that the seller's refusal to obtain subdivision approval did not make the title unmarketable. Dismissing the purchaser's claim, the court stated that marketability of title is concerned with “the right to unencumbered ownership and possession, not with the legal public regulation of the use of the property.” Id.

Because they do not render title unmarketable, zoning and other regulatory violations that are not expressly covered under the title insurance policy will not result in
liability on title insurers for damages claimed by purchasers. Thus, in Logan v. Barretto, 251 A.D.2d 552, the court dismissed the purchaser's claim for breach of contract against the title insurer when the title insurer failed to disclose sanitary code violations in the title report prior to the purchase of the property. The court held that the title insurer's standard policy, which was silent on the issue of zoning ordinances, covered only defects and unmarketability of the title. Id. The title insurer's freedom from liability is even more clear when zoning violations are expressly excluded from coverage. In Wolf v. Commonwealth Land Title Insurance Co., 180 Misc.2d 307, 690 N.Y.S.2d 880, the court granted the title insurer's motion for summary judgment when purchaser brought a claim for the cost of removing a deck/extension that violated the certificate of occupancy and/or zoning ordinances. The court held that because a zoning violation is not an encumbrance on the title, and the title insurance policy expressly excluded from its coverage loss from zoning ordinances, the damages did not fall within the scope of the policy. Id.

However, sellers are liable to purchasers for breach of contract when sellers, in the contract, warrant that the premises are free from zoning violations, but in fact the premises do violate the applicable zoning ordinance. For example, in Pamerqua Realty Corp. v. Dollar Service Corp., 93 A.D.2d 249,' the court held that purchasers were entitled to return of their down payment where the seller had refused to obtain necessary municipal approval for a division of the property, despite a provision in the sale contract stating that the premises are to be conveyed subject to “zoning regulations and ordinances of the city ' which are not violated by existing structures.”

'

Entitlement to Partition May Be Rebutted

Diaz v. Alcantara

NYLJ 2/20/13, p. 21, col. 1

Supreme Ct., N.Y. Cty.

(Kenney, J.)

In an action for partition and sale of a residential building, co-tenant Diaz sought summary judgment on his claim for division and sale of the building. The court denied Diaz's motion for a judgment of partition, struck co-tenant Alcantara's affirmative defenses and counterclaims, and referred the matter to a referee to hear and report on the parties' rights and interests.

Diaz and Alcantara, who were then dating, purchased the subject building in 2002. They allegedly made a down payment of $101,000, and took out a mortgage for the rest of the purchase price. The parties dispute whether the price was $360,000 or $465,000, and dispute how much each contributed to the purchase price. Because Alcantara did not have a reliable credit history, a friend joined with Diaz to seek the mortgage, with an understanding (not disputed by either party) that the friend would convey her interest to Alcantara. The couple broke up in 2004, and since that time, Alcantara has lived in the building (which has two other apartments), has paid for most mortgage and maintenance expenses, and has collected all rent. The parties refinanced the mortgage in 2007. In this action, Diaz sought partition and sale because he no longer wanted to own the property with Alcantara.'

The court first struck Alcantara's affirmative defenses and dismissed her counterclaims. But the court then held that Alcantara had rebutted Diaz's prima facie entitlement to partition by her undisputed claims that she has been the sole caretaker for the past 11 years. The court then indicated that Diaz was entitled to an accounting which would consider the parties' actual financial and non-financial contributions. The court appointed a referee to determine the accounting and to recommend whether partition and sale is the proper remedy for the dispute.

COMMENT

Although Real Property Actions and Proceedings Law ' 901 states that a “person holding and in possession of real property as joint tenant or tenant in common ' may maintain an action for the partition of the property,” courts will not grant partition where there is an agreement which gives, or a divorce decree which awards, a non-partitioning joint tenant or tenant in common “exclusive possession” or an “exclusive right to occupy” the property. For example, in Petty v. Petty, 7 9 A.D.2d 679, 679-80, the court held that where the separation agreement contained the phrases “exclusive possession” and “exclusive right to occupy,” it was clear that the manifested intent of the parties was to provide the wife with the right to occupy the premises to the exclusion of her former husband and tenant in common. The agreement, therefore, precluded the former husband from compelling partition. Similarly, in Ripp v. Ripp, 38 A.D.2d 65, 70-71, where the divorce decree awarded the defendant wife sole and exclusive possession of the marital home, the court affirmed the lower court's dismissal of the partition action; however, the court noted that the plaintiff husband could move for modification of the judgment of divorce granting him the right to institute an action for partition.

Before a court will consider the merits of an action for partition, the parties must prove their respective interests in the property.

In Goldberger v. Rudnicki, 94 A.D.3d 1048, 1050, the plaintiff brought an action for partition and sale of one of three parcels. The court reversed an order granting plaintiff's motion for summary judgment in favor of partition because the issues of the respective interests, rights, and share in the property remained unresolved. Id.

Although a number of cases, particularly in the Second Department, assert that the right to partition is not absolute, and is always subject to the equities between the parties, almost all of those cases in fact find that the equities favor partition. See, e.g. Graffeo v. Paciello, 46 A.D.2d 613, Arata v. Behling , 57 A.D.3d 925, 926, in which the court upheld the denial of the plaintiff's motion for summary judgment, is a rare exception. Francis Arata, plaintiff's father, owned the subject property as joint tenant with defendant. Francis conveyed his right, title, and interest to plaintiff, while reserving a life estate, which was later released to plaintiff as well. Without citing specific facts, the court indicated that trial was necessary to determine whether the equities favored partition. In Stressler v. Stressler, the Second Department went further, and dismissed a former husband's action for partition against his co-tenant wife because the parties' unemancipated son, who was under the age of 21 years, still resided in the subject residence. 193 A.D.2d 728. What is not clear from the brief memorandum in Stressler is whether the court's conclusion rested, at least in part, on its construction of the terms of the divorce decree or stipulation. Sherman v. Sherman, 168 A.D.2d 550 was the only case the court cited for its conclusion that the equities did not favor partition, and in Sherman, t he court relied on its construction of a stipulation between divorcing parties.'

'

Constructive Trust Claim Fails for Inadequate Proof of Reliance

Henning v. Henning

NYLJ 2/22/13, p. 25, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to impose a constructive trust on real property, plaintiff appealed from Supreme Court's grant of judgment as a matter of law to defendants. The Appellate Division affirmed, holding that plaintiff had not demonstrated any reliance on the purported promise of defendants, her former in-laws.

When plaintiff and her husband moved into the subject property in 1985, record title was held by the husband's mother. Over the course of time, the husband's parents executed a number of deeds conveying interests in the property to a series of trusts. Husband and wife separated in 2009, and plaintiff wife brought this action to impose a constructive trust on the property. Her complaint alleged that her husband's parents had promised to convey the property to plaintiff and her husband, and that she and the husband had expended considerable funds to maintain and improve the property, all in reliance on the parents' promise. After a non-jury trial, Supreme Court dismissed the complaint, concluding that there was insufficient evidence of a promise to convey, that the evidence presented indicated that the expenses incurred were principally for the benefit of the husband, wife and their children, and that the parents were not unjustly enriched because the value of the improvements did not approach what the husband and wife would have spent on the purchase, upkeep, and maintenance of their own home if they had not been permitted to live rent free in the subject house. Plaintiff wife appealed.

In affirming, the Appellate Division held that plaintiff wife had failed to meet the burden of demonstrating that she had developed an equitable interest in the property through her expenditure of time, money and labor. The court noted that the improvements she made could be considered rent, rather than expenditures made in reliance on the alleged promise to convey. Finally, the court agreed with Supreme Court that the wife had demonstrated no unjust enrichment in light of the parents' failure to seek or receive any rent payments for more than 25 years.

COMMENT

When an occupant seeks to impose a constructive trust against a record owner, the occupant must show detrimental reliance upon a promise made by the record. Sharp v. Kosmalski, 40 N.Y.2d 119. The occupant can show that the expenditures were made in reliance on a promise by demonstrating that' no reasonable occupant would have made the expenditures of time, money or labor but for a promise to convey an interest in the property. Id. Hence, in Washington v. Defense, 149 A.D.2d 697,698 the Appellate Division upheld the imposition of a constructive trust against a record owner where the occupant, who alleged' a promise made by the record owner to put the deed in both of their names, established that she had paid part of the down payment, did all the necessary preparatory work to obtain loans, obtained a loan on her own home to contribute to the cost of construction, invested a gift from her father in the property, and painted, laid tile, and installed the insulation. Likewise, in Lester v. Zimmer, 147 A.D.2d 340,342 the court held that “a premarital transfer of funds for the improvement of realty can form a predicate for the imposition of a constructive trust.” The Appellate Division affirmed a lower court denial of a record owner's motion for summary judgment because the occupant had indicated that she had provided financial support for record owner during the period of construction, contributed over $1,300 to the cost of materials, and actually participated in building the house over a two-year period.

When a reasonable occupant might have been induced to make expenditures by facts other than record owner's promise, courts will not impose a constructive trust. In Matter of Lefton, 160 A.D.2d 702, despite the fact that the occupant-son moved onto the property to take care of his father, the record owner, the court found that the father's wife, who held an interest as a tenant by the entirety, was free to convey the property upon the father's death because the occupant had failed to establish that he would not have contributed his time, money and labor but for a promise to convey an interest in the property. The court observed that the occupant might have made the expenditures “to improve the surroundings in which he and his family lived.” In Marini v. Lombardo, 79 A.D.3d 932, the court also refused to impose a constructive trust where the occupant, record owner's son-in-law, asserted a counterclaim' after the record owner brought an action for ejectment and damages for non-payment of use and occupancy. There, the court held that the occupant failed to establish that the only plausible explanation for the expenditures (addition of a swimming pool, tile work and interior painting) was because a promise had been made by the record owner to convey an interest in the property. Id. at 934-35.'

'

Questions of Fact Preclude Summary Discharge of Mortgage

Beltway Capital, LLC v. Soleil

NYLJ 3/8/13, AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagee's assignee appealed from Supreme Court's refusal to vacate an order discharging the mortgage, and from Supreme Court's cancellation of the mortgagee's notice of pendency. The Appellate Division reversed and reinstated the mortgage and the notice of pendency, noting that questions of fact remained about the bona fide purchaser status of a subsequent purchaser of the property.

In 2007, mortgagee brought this action to foreclose on a mortgage securing a $625,000 loan mortgagee had extended to Soleil. Mortgagee filed a notice of pendency in conjunction with the foreclosure action. Soleil did not appear, and Supreme Court granted mortgagee an order of reference. Then, in 2008, Soleil moved to dismiss the foreclosure action, contending that he had paid off the mortgage.

Because mortgagee did not respond to the motion, Supreme Court granted the motion, cancelled the notice of pendency, and discharged the mortgage. Soleil then sold the property to Hughes, who transferred the property to herself and her husband. At the time of the transfer, they executed a mortgage to Sperry. Mortgagee then assigned the original mortgage to assignee, who moved to vacate the original mortgagee's default in appearing. Assignee also filed a notice of pendency. Then, in 2011, Supreme Court denied assignee's motion to vacate dismissal of the foreclosure action. The court held that although the mortgage might have been erroneously discharged because the mortgage had not, in fact, been paid, the mortgage cannot be reinstated when there has been detrimental reliance on the erroneous discharge be bona fide purchaser or encumbrancers. In this case, Supreme Court held that because Hughes and others had relied on the discharge, assignee was not entitled to vacate the discharge. As a result, Supreme Court vacated the notice of pendency.

In reversing, the Appellate Division noted first that the erroneous discharge was based on Soleil's fraud and misrepresentation that the mortgage loan had been paid. In that circumstance, mortgagee was entitled to have the erroneous discharge set aside' when there has not been detrimental reliance by a bona fide purchaser. In this case, however, only limited discovery had been completed, and it was not clear that Hughes had established that she was a bona fide purchaser. As a result, the court should have vacated the discharge, reinstated the mortgage, and restored the notice of pendency.

COMMENT

A mortgagee is entitled to vacatur of a mistaken discharge of a mortgage where no one has relied on the erroneous recording to his or her detriment. Detrimental reliance occurs when a party' invests in property, by making a purchase, making improvements, or extending a loan, without notice of the mistake. Thus, in Application of Ditta, 221 N.Y.S.2d 34, 35, Special Term declined to reinstate a lien' because one buyer purchased his interest in the property without notice that the lien had mistakenly been discharged. Similarly, in DLJ Mortg. Capital, Inc. v. Windsor, 78 A.D.3d 645, the Second Department refused to vacate a mistaken satisfaction because a subsequent lender who had no notice of the mistake made a loan in reliance on that satisfaction.

A claim of detrimental reliance will not succeed when the person claiming reliance had notice of the mistaken discharge. For example, in Deutsche Bank Trust Co. v. Stathakis, 9 0 A.D.3d 983, the Second Department rejected a mortgagor's contention that he contracted for renovations to the property in reliance on the bank's mistakenly recorded satisfaction, emphasizing that the bank had moved to vacate the satisfaction over six months before the mortgagor contracted for renovations, providing the mortgagor with sufficient notice of the erroneous satisfaction. Id. at 984. As a result, any reliance was unreasonable.

If no one has relied on the erroneous discharge, the mortgagee is entitled to reinstatement of the old mortgage or replacement with a new equivalent mortgage. For instance, in Citibank, N.A. v. Kenney, 17 A.D.3d 305, the Second Department held that a senior mortgagee that had erroneously executed and recorded a satisfaction of its mortgage was nevertheless entitled to priority over two subsequent mortgages, both of which were executed before the satisfaction was erroneously recorded. Because the subsequent mortgages were executed before the satisfaction, the subsequent mortgagees could not have relied on the erroneous satisfaction. However, if either of the junior mortgagees changed its position without notice of the mistaken discharge, the court would have likely upheld the mistaken satisfaction. Id.

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