Real Property Law

AppDiv, Second Dept.

(memorandum opinion)

In an action by transferor to set aside a deed on the ground that it was security for a usurious mortgage, a subsequent purchaser appealed from Supreme Court's judgment setting aside the deed. The Appellate Division affirmed, holding that subsequent purchasers could not assert the protection of the recording act when a deed on which they rely is void.

Transferor Bouffard acquired title from Tedesco in 1993 or 1994 when Tedesco was facing foreclosure. Bouffard financed the purchase with a mortgage, and claim to have held title on Tedesco's behalf. In 2004, Tedesco sought financing for a business venture, and Tedesco and Bouffard obtained a mortgage loan from JR Factors. Tedesco never repaid the principal of the loan, but then sought additional financing from JR's principal. The principal was unwilling to offer any more mortgage loan money, but offered to have Befese, another of his corporations, purchase the property from Bouffard and Tedesco, giving the sellers an option to repurchase within 90 days at an option price that reflected a significant premium.

Tedesco and Bouffard agreed, and, in August 2004, Bouffard signed both the deed and the option agreement. Tedesco and Bouffard did not exercise the repurchase option. In September 2005, Befese sold the property to Ippoliti. Three months later, Ippoliti transferred the property to himself and another, and then, on the same day, the two transferred the property to Hawkes Crossing, an entity controlled by the owner of adjacent land. In 2006, Bouffard and Tedesco brought this action to set aside the August 2004 deed. Supreme Court declared the deed void, and Hawkes Crossing appealed.

In affirming, the Appellate Division started by holding that the August 2004 deed was in reality a mortgage. The court relied on Real Property Law section 320, which provides that a deed “intended only as security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.” The court then held that the mortgage itself was void because the terms of the option agreement had the same effect as a mortgage with an interest rate higher than the maximum permitted by the usury laws. Next, the court rejected Hawkes Crossing's argument that it should be protected by the recording act, concluding that although a bona fide purchaser may be protected against a fraudulently procured deed, the recording acts do not protect a purchaser whose title depends on a void deed. Finally, the court upheld Supreme Court's dismissal of Hawkes Crossing's cross claims against its transferors, concluding that the trial court was warranted in its conclusion that Hawkes Crossing's principal should have made further inquiry into the circumstances of prior transfers.

COMMENT

Generally, the recording act protects a subsequent bona fide purchaser or encumbrancer for value against the claims of prior purchasers or encumbrancers who did not record their interests. McKinney's Real Property Law ' 266. For example, in Berger v. Polizotto, 148 A.D.2d 651, a seller entered into a contract of sale of property with Berger and subsequently sold the same property to Polizotto. The court held that Polizotto was protected against Berger's prior unrecorded contract because he purchased the property for valuable consideration and was not on inquiry notice that the seller had entered into contract with Berger first. However, the recording acts do not protect a purchaser whose chain of title rests on a forged deed, even if the deed appeared to be properly recorded, because Courts deem forged instruments to be void ab initio. For instance, in ABN AMRO Mortgage Grp., Inc. v. Stephens, 91 A.D.3d 801, the court declared a subsequent purchaser's interest in property void as against a prior unrecorded mortgage because the signature on the power of attorney form which granted the seller the right to convey the property was forged. When a deed is declared void, it is as if it never existed. Therefore, the grantor does not possess any title to convey to the subsequent purchaser

In Bouffard, the court extended to usurious mortgages the same void ab initio rule courts apply to forged deeds. The court in Bouffard relied on Abir v. Malky, Inc., 59 A.D.3d 646, for the proposition that a usurious loan is void and relieves the borrower of the obligation to repay principal and interest on the loan. In Abir, lender Malky provided owner Abir with usurious bridge financing. The court held that the Abir/Malky agreement was void and unenforceable as a result. Though the court labeled the agreement in Abir “void,” the court would have reached the same result if it had deemed the transaction “voidable,” because the case involved no subsequent purchasers. Yet the court in Bouffard seized upon use of the word “void” in Abir to deny protection to a subsequent purchaser.

Unlike the typical victim of a forgery, who knows nothing of the forgery and is in no position to protect himself, the victim of a usurious loan is an active participant in the transaction. Whether the borrower deserves the same protection against subsequent purchasers for value as a forgery victim is an issue that had not previously arisen. Perhaps the court in Bouffard was willing to draw the analogy to forgeries because it was skeptical regarding the bona fide purchaser status of the subsequent purchaser, Hawkes Crossing. Bouffard, 111 A.D.3d 866, at 515.'

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Strict Foreclosure Not Available Against Easement Holder

Bass v. D. Ragno Realty Corp.

NYLJ 12/12/13, p. 33, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action for strict foreclosure, mortgagee appealed from Supreme Court's order dismissing the complaint. The Appellate Division affirmed, holding that strict foreclosure is not available against an easement holder.

Mortgagee originally held fee title to the subject commercial property. Mortgagee sold the property to Swinging Deli, taking back a purchase money mortgage. Swinging Deli then conveyed an easement over the property to an adjacent property owner. When Swinging Deli defaulted on the mortgage note, mortgagee foreclosed, but did not name the adjacent property owner as a defendant because mortgagee was unaware of the easement.' Mortgagee obtained a judgment of foreclosure and sale, and purchased the subject property at the foreclosure sale for $850,508.91. Mortgagee then brought this action for strict foreclosure, seeking to require the adjacent property owner to redeem the property for $850,508.91, or else have the easement extinguished. Supreme Court dismissed the complaint, and mortgagee appealed.

In affirming, the Appellate Division focused on RPAPL 1352, which permits strict foreclosure against a person not named in the foreclosure action who has a right of redemption or a right to foreclose a subordinate mortgage or other lien. Because an easement is not a mortgage or a lien, and an easement holder does not have a right of redemption the court held that strict foreclosure actions are not available against easement holders.'

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No Deficiency Judgment When Mortgagee Does Not Establish Fair Market Value of Premises

Eastern Savings Bank, FSB v. Brown

NYLJ 12/13/13, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's grant of mortgagee's motion to confirm a referee's report of the sale and to enter a deficiency judgment against mortgagor. The Appellate Division modified to strike the entry of a deficiency judgment because mortgagee had not adequately established the fair market value of the premises.

When mortgagee initially sought summary judgment on its foreclosure complaint, mortgagor defaulted. Supreme Court entered a judgment of foreclosure and sale, and denied mortgagor's subsequent motions to vacate his default and the judgment of foreclosure and sale. After the sale, at which mortgagee was apparently the only bidder, the mortgagee moved to fix the fair market value of the premises at $550,000, and for leave to enter a deficiency judgment in the amount of $611,198, representing the difference between the balanced owed and the fair market value. Supreme Court granted the motion.

In modifying, the Appellate Division held that Supreme Court had properly denied mortgagor's motion to vacate the default because the motion restated grounds mortgagor had raised in an earlier motion from which he failed to appeal. But the court held that mortgagee had not submitted sufficient evidence to justify fixing the fair market value of the premises at $550,000. The court concluded that an affidavit by a real estate appraiser who did not describe the subject premises and who did not append evidence of comparable sales and market data, was insufficient to establish the fair market value of the premises. The court emphasized the conclusory nature of the appraiser's affidavit, and the absence of any explanation of how average prices in the area related to the appraiser's conclusion about the fair market value of the subject parcel.

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No Private Right of Action Against the State

Flagstar Bank, FSB v. State of New York

NYLJ 12/31/13, p. 30, col. 4

AppDiv, Second Dept.

(Opinion by Angiolillo, J.)

In an action by a judgment creditor against the state for damages resulting from a county clerk's error in docketing a judgment, which allowed a judgment debtor to convey real property free of the judgment lien, the judgment creditor appealed from a Court of Claims order granting summary judgment to the state. The Appellate Division affirmed, holding that judgment creditors have no private right of action against the state for negligence in docketing judgment liens.

Judgment creditor obtained a federal judgment against Caribbean Mortgage Corp. and its president, Udit Meeto. The judgment creditor then submitted an abstract of judgment to the Queens County Clerk's office listing the parties against whom the judgment had entered as “Caribbean Mortgage Corp. and Udit Meetoo.” In docketing the judgment, the county clerk identified Meeto as a debtor/corporation rather than as an individual, even though the copy of the judgment ' which judgment creditor submitted along with the abstract ' identified Meeto as an individual. As a result of the discrepancy, Meeto was able to convey two parcels of real property before judgment creditor learned of the conveyances and notified the county clerk of the error. Judgment creditor then brought this action, alleging that the county clerk's negligence resulted in loss of its judgment liens against the two parcels of property. The Court of Claims granted the state's summary judgment motion.

In affirming, the Second Department acknowledged an earlier First Department opinion awarding summary judgment to a claimant for negligent docketing of a judgment. National Westminster Bank, USA, v. State of New York, 155 AD2d 261, affd 76 NY2d 507. But the court then observed that subsequent Court of Appeals authority made it clear that government action, if discretionary, can be a basis for liability only when the government's action create a special duty to the plaintiff, apart from any duty to the public in general. McLean v. City of New York, 12 NY3d 194. With respect to docketing of judgments, the court noted that the statute imposing the obligation to docket judgments does not expressly create a private right of action, and that the obligation was designed as much to protect prospective purchasers of real property as to protect judgment creditors. The court then emphasized that the judgment creditor is in the best position to ensure proper recording by checking on the accuracy of the public record. Holding that the state did not owe the judgment creditor a special duty of care, the court affirmed the award of summary judgment to the state.

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Subsequent Purchasers Cannot Assert Protection of Recording Act

Bouffard v. Befese, LLC

NYLJ 12/12/13, p. 33, col. 4

AppDiv, Second Dept.

(memorandum opinion)

In an action by transferor to set aside a deed on the ground that it was security for a usurious mortgage, a subsequent purchaser appealed from Supreme Court's judgment setting aside the deed. The Appellate Division affirmed, holding that subsequent purchasers could not assert the protection of the recording act when a deed on which they rely is void.

Transferor Bouffard acquired title from Tedesco in 1993 or 1994 when Tedesco was facing foreclosure. Bouffard financed the purchase with a mortgage, and claim to have held title on Tedesco's behalf. In 2004, Tedesco sought financing for a business venture, and Tedesco and Bouffard obtained a mortgage loan from JR Factors. Tedesco never repaid the principal of the loan, but then sought additional financing from JR's principal. The principal was unwilling to offer any more mortgage loan money, but offered to have Befese, another of his corporations, purchase the property from Bouffard and Tedesco, giving the sellers an option to repurchase within 90 days at an option price that reflected a significant premium.

Tedesco and Bouffard agreed, and, in August 2004, Bouffard signed both the deed and the option agreement. Tedesco and Bouffard did not exercise the repurchase option. In September 2005, Befese sold the property to Ippoliti. Three months later, Ippoliti transferred the property to himself and another, and then, on the same day, the two transferred the property to Hawkes Crossing, an entity controlled by the owner of adjacent land. In 2006, Bouffard and Tedesco brought this action to set aside the August 2004 deed. Supreme Court declared the deed void, and Hawkes Crossing appealed.

In affirming, the Appellate Division started by holding that the August 2004 deed was in reality a mortgage. The court relied on Real Property Law section 320, which provides that a deed “intended only as security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.” The court then held that the mortgage itself was void because the terms of the option agreement had the same effect as a mortgage with an interest rate higher than the maximum permitted by the usury laws. Next, the court rejected Hawkes Crossing's argument that it should be protected by the recording act, concluding that although a bona fide purchaser may be protected against a fraudulently procured deed, the recording acts do not protect a purchaser whose title depends on a void deed. Finally, the court upheld Supreme Court's dismissal of Hawkes Crossing's cross claims against its transferors, concluding that the trial court was warranted in its conclusion that Hawkes Crossing's principal should have made further inquiry into the circumstances of prior transfers.

COMMENT

Generally, the recording act protects a subsequent bona fide purchaser or encumbrancer for value against the claims of prior purchasers or encumbrancers who did not record their interests. McKinney's Real Property Law ' 266. For example, in Berger v. Polizotto, 148 A.D.2d 651, a seller entered into a contract of sale of property with Berger and subsequently sold the same property to Polizotto. The court held that Polizotto was protected against Berger's prior unrecorded contract because he purchased the property for valuable consideration and was not on inquiry notice that the seller had entered into contract with Berger first. However, the recording acts do not protect a purchaser whose chain of title rests on a forged deed, even if the deed appeared to be properly recorded, because Courts deem forged instruments to be void ab initio. For instance, in ABN AMRO Mortgage Grp., Inc. v. Stephens, 91 A.D.3d 801, the court declared a subsequent purchaser's interest in property void as against a prior unrecorded mortgage because the signature on the power of attorney form which granted the seller the right to convey the property was forged. When a deed is declared void, it is as if it never existed. Therefore, the grantor does not possess any title to convey to the subsequent purchaser

In Bouffard, the court extended to usurious mortgages the same void ab initio rule courts apply to forged deeds. The court in Bouffard relied on Abir v. Malky, Inc., 59 A.D.3d 646, for the proposition that a usurious loan is void and relieves the borrower of the obligation to repay principal and interest on the loan. In Abir, lender Malky provided owner Abir with usurious bridge financing. The court held that the Abir/Malky agreement was void and unenforceable as a result. Though the court labeled the agreement in Abir “void,” the court would have reached the same result if it had deemed the transaction “voidable,” because the case involved no subsequent purchasers. Yet the court in Bouffard seized upon use of the word “void” in Abir to deny protection to a subsequent purchaser.

Unlike the typical victim of a forgery, who knows nothing of the forgery and is in no position to protect himself, the victim of a usurious loan is an active participant in the transaction. Whether the borrower deserves the same protection against subsequent purchasers for value as a forgery victim is an issue that had not previously arisen. Perhaps the court in Bouffard was willing to draw the analogy to forgeries because it was skeptical regarding the bona fide purchaser status of the subsequent purchaser, Hawkes Crossing. Bouffard, 111 A.D.3d 866, at 515.'

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Strict Foreclosure Not Available Against Easement Holder

Bass v. D. Ragno Realty Corp.

NYLJ 12/12/13, p. 33, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action for strict foreclosure, mortgagee appealed from Supreme Court's order dismissing the complaint. The Appellate Division affirmed, holding that strict foreclosure is not available against an easement holder.

Mortgagee originally held fee title to the subject commercial property. Mortgagee sold the property to Swinging Deli, taking back a purchase money mortgage. Swinging Deli then conveyed an easement over the property to an adjacent property owner. When Swinging Deli defaulted on the mortgage note, mortgagee foreclosed, but did not name the adjacent property owner as a defendant because mortgagee was unaware of the easement.' Mortgagee obtained a judgment of foreclosure and sale, and purchased the subject property at the foreclosure sale for $850,508.91. Mortgagee then brought this action for strict foreclosure, seeking to require the adjacent property owner to redeem the property for $850,508.91, or else have the easement extinguished. Supreme Court dismissed the complaint, and mortgagee appealed.

In affirming, the Appellate Division focused on RPAPL 1352, which permits strict foreclosure against a person not named in the foreclosure action who has a right of redemption or a right to foreclose a subordinate mortgage or other lien. Because an easement is not a mortgage or a lien, and an easement holder does not have a right of redemption the court held that strict foreclosure actions are not available against easement holders.'

'

No Deficiency Judgment When Mortgagee Does Not Establish Fair Market Value of Premises

Eastern Savings Bank, FSB v. Brown

NYLJ 12/13/13, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's grant of mortgagee's motion to confirm a referee's report of the sale and to enter a deficiency judgment against mortgagor. The Appellate Division modified to strike the entry of a deficiency judgment because mortgagee had not adequately established the fair market value of the premises.

When mortgagee initially sought summary judgment on its foreclosure complaint, mortgagor defaulted. Supreme Court entered a judgment of foreclosure and sale, and denied mortgagor's subsequent motions to vacate his default and the judgment of foreclosure and sale. After the sale, at which mortgagee was apparently the only bidder, the mortgagee moved to fix the fair market value of the premises at $550,000, and for leave to enter a deficiency judgment in the amount of $611,198, representing the difference between the balanced owed and the fair market value. Supreme Court granted the motion.

In modifying, the Appellate Division held that Supreme Court had properly denied mortgagor's motion to vacate the default because the motion restated grounds mortgagor had raised in an earlier motion from which he failed to appeal. But the court held that mortgagee had not submitted sufficient evidence to justify fixing the fair market value of the premises at $550,000. The court concluded that an affidavit by a real estate appraiser who did not describe the subject premises and who did not append evidence of comparable sales and market data, was insufficient to establish the fair market value of the premises. The court emphasized the conclusory nature of the appraiser's affidavit, and the absence of any explanation of how average prices in the area related to the appraiser's conclusion about the fair market value of the subject parcel.

'

'

No Private Right of Action Against the State

Flagstar Bank, FSB v. State of New York

NYLJ 12/31/13, p. 30, col. 4

AppDiv, Second Dept.

(Opinion by Angiolillo, J.)

In an action by a judgment creditor against the state for damages resulting from a county clerk's error in docketing a judgment, which allowed a judgment debtor to convey real property free of the judgment lien, the judgment creditor appealed from a Court of Claims order granting summary judgment to the state. The Appellate Division affirmed, holding that judgment creditors have no private right of action against the state for negligence in docketing judgment liens.

Judgment creditor obtained a federal judgment against Caribbean Mortgage Corp. and its president, Udit Meeto. The judgment creditor then submitted an abstract of judgment to the Queens County Clerk's office listing the parties against whom the judgment had entered as “Caribbean Mortgage Corp. and Udit Meetoo.” In docketing the judgment, the county clerk identified Meeto as a debtor/corporation rather than as an individual, even though the copy of the judgment ' which judgment creditor submitted along with the abstract ' identified Meeto as an individual. As a result of the discrepancy, Meeto was able to convey two parcels of real property before judgment creditor learned of the conveyances and notified the county clerk of the error. Judgment creditor then brought this action, alleging that the county clerk's negligence resulted in loss of its judgment liens against the two parcels of property. The Court of Claims granted the state's summary judgment motion.

In affirming, the Second Department acknowledged an earlier First Department opinion awarding summary judgment to a claimant for negligent docketing of a judgment. National Westminster Bank, USA, v. State of New York , 155 AD2d 261, affd 76 NY2d 507. But the court then observed that subsequent Court of Appeals authority made it clear that government action, if discretionary, can be a basis for liability only when the government's action create a special duty to the plaintiff, apart from any duty to the public in general. McLean v. City of New York , 12 NY3d 194. With respect to docketing of judgments, the court noted that the statute imposing the obligation to docket judgments does not expressly create a private right of action, and that the obligation was designed as much to protect prospective purchasers of real property as to protect judgment creditors. The court then emphasized that the judgment creditor is in the best position to ensure proper recording by checking on the accuracy of the public record. Holding that the state did not owe the judgment creditor a special duty of care, the court affirmed the award of summary judgment to the state.

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