Real Property Law

Deed in Chain of Title Procured by Fraud in the Factum

Williams v. Mentore

NYLJ 3/7/14, p. 23, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to set aside two deeds and a mortgage on the ground of fraud, mortgagee appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that the mortgagee had not established that it was entitled to the protection of the recording act.

The 83-year-old current resident of the subject property purchased it in 1976. In January 2007, she executed a deed purporting to transfer the property to Bindra, and in October 2008, Bindra executed a deed purporting to transfer the property to London. The latter executed a mortgage in favor of the bank. In this action, plaintiff resident of the property sought to invalidate the two deeds and the mortgage, contending that they were procured by fraud. Supreme Court denied the bank's motion to dismiss the complaint.

In affirming, the Appellate Division first noted that section 266 of the Real Property Law protects subsequent purchasers for value unless the purchaser “had previous notice of the fraudulent intent of his ' grantor, or of the fraud rendering void the title of such grantee.”

In this case, however, the court held that the plaintiff resident's possession of the premises put the bank on inquiry notice of her potential right to the property. As a result, the bank was not entitled to dismissal of the complaint. The court then went on to note that RPL section 266 does not protect a subsequent purchaser for value when there has been fraud in the factum, because fraud in the factum renders the deed void, so that a subsequent purchaser or incumbrancer would receive nothing. Because there remain triable issues of fact about plaintiff resident's fraud claim, the bank was not entitled to dismissal of the complaint.

COMMENT

Prior New York cases have suggested that deeds procured by fraud in the factum should be treated like deeds procured by forgery: Subsequent purchasers relying on those deeds are not protected by the recording acts. See JP Morgan Chase Bank, Nat. Ass'n v. Kalpakis, 91 A.D.3d 722, 937 N.Y.S.2d 105 (2012) (in an action to void a mortgage based on forgery, mortgagee bank's interest would not be protected under RPL ' 266 if grantor's deed was procured by either fraud in the factum or forgery). Finding cases in which a deed is invalid for fraud in the factum, however, proves difficult. In dictum, courts have suggested that fraud in the factum is a defense exists when a misrepresentation causes the signor to misunderstand the nature of the legal document he is executing ' but not if the signor's reliance on the misrepresentation is negligent. For example, in Cash v. Titan Fin. Servs., Inc., 58 A.D.3d 785, 873 N.Y.S.2d 642 (2009), the court rejected a fraud in the factum defense when a signor who could read was misled into signing sales documents when he thought he was signing mortgage-refinancing documents. The court emphasized that the signor was neither prevented from reading the closing documents, nor told not to read them.

In contrast, when a signor is aware of the nature of the legal document he is signing, but signed it based on a misrepresentation of facts, the fraud is “fraud in the inducement,” and a subsequent purchaser's title will be protected under RPL ' 266. For example, in Retek v. 233 Associates, Inc., 41 Misc. 3d 1220(A) (N.Y. Sup. Ct. 2013), the court held that since the signor knew she was signing a deed, the subsequent encumbrancer was protected under RPL ' 266 even though the deed was tainted by fraudulent inducement. In that case, the grantor, purporting to be President of the corporate owner, executed a deed to herself. In fact, she was not President of the owner. She later executed a $450,000 mortgage to another company, which then assigned the mortgage to FNMA. Id. When the corporate owner's sole shareholder sought to invalidate the mortgage, the court rejected the claim, holding that the deed was procured by fraudulent inducement, rather than fraud in the factum, because the grantor signed her own name and misrepresented herself as the person signing the deed, with no deception as to the nature of the legal document. The court held that RPL ' 266 protected the mortgagee bank's title.

Violation of Restrictive Covenant Insufficient to Support Unjust Enrichment Claim

Leidel v. Annicelli

NYLJ 2/20/14, p. 25, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action by neighbor against landowner for unjust enrichment, constructive trust and quasi-contract, neighbor appealed from Supreme Court's grant of landowner's motion to dismiss the complaint.The Appellate Division affirmed, holding that the relationship of neighbors was insufficient to support a claim for unjust enrichment.

In 1998, landowner leased its property to Verizon for construction and operation of a cellular telephone facility. In 2000, neighbors and others brought an action to enforce restrictive covenants limiting use of landowner's property to residential development. In 2001, Supreme Court permanently enjoined violation of the covenants and directed landowner to remove the facility. The facility was not removed, however, until 2007. In 2010, neighbors brought this action for rents collected by landowner in violation of the covenants from the date the Court of Appeals affirmed Supreme Court's injunction until the date the facility was removed. Supreme Court granted landowner's motion to dismiss the complaint.

In affirming, the Appellate Division held that the relationship between abutting neighbors is not one that could have induced reliance or inducement, and therefore could not support an unjust enrichment claim. Moreover, although the court conceded that an eyesore could affect property values, the court noted that the complaint did not allege that the cellular facility affected the value of neighbors' property. The court then held that neighbors did not allege all of the elements necessary to sustain claims for constructive trust or quasi-contract.

COMMENT

The Restatement provides that a conscious wrongdoer who obtains a benefit by unauthorized interference with another's property interest will be required to disgorge all gains derived from the unlawful conduct. Restatement (Third) of Restitution and Unjust Enrichment ' 40 (“[A] conscious wrongdoer will be stripped of gains from unauthorized interference with another's property ' while the restitutionary liability of a defendant without fault will not exceed the value obtained in the transaction for which liability is imposed.”). New York Courts have adopted this principle in cases involving willful trespass. For example, in DeCamp v. Bullard, 159 N.Y. 450(1899), the court held that where trespassers used property owner's river to float logs to their mill, property owner was entitled to all gains derived from the unlawful conduct. The court stated that damages measured by what the property owner actually lost would incentivize trespassing rather than lawful contracting. Thus, the court concluded that damages for willful trespass should be measured by the benefit to the trespasser where property owner has not incurred a measurable loss. Id. at 28. By contrast, an inadvertent trespasser will not be required to disgorge all gains derived from interference with another's property. For example, in Salesian Soc., Inc. v. Vill. of Ellenville, 505 N.Y.S.2d 197, the court held that diminution of value was the appropriate measure of damages for a telephone company's inadvertent trespass resulting from confusion as to who owned title to the property.

However, at least one other New York court before Leidel has held that disgorgement of profits is not an appropriate remedy for a claim that landowner was unjustly enriched by the breach of a restrictive covenant. In New York City Econ. Dev. Corp. v. T.C. Foods Imp. & Exp. Co., Inc., 819 N.Y.S.2d 849aff'd, 847 N.Y.S.2d 669, plaintiff alleged that neighboring landowner was unjustly enriched by the construction and maintenance of an advertising billboard in violation of a restrictive covenant, and sought the disgorgement of profits made from the billboard's advertising revenue. The court held that plaintiff failed to establish a prima facie case for unjust enrichment because plaintiff had not shown that the neighboring landowners were enriched at the expense of plaintiff. Neither the court in T.C. Foods nor the court in Leidel attempted to explain why the disgorgement rule applicable in trespass cases should not also apply to cases involving violation of a restrictive covenant.

Title Insurer's Failure to Record

Union Street Tower LLC v. First American Title Company

42 Misc.3d 1229A

Supreme Ct., Kings Cty

(Rothenberg, J.)

In an action by insured against title insurer, the latter moved to dismiss the complaint. Supreme Court granted the motion, holding that the title insurance policy did not insure air rights acquired by the insured, and that title insurer was not negligent in failing to record relevant purchase documents because the insurer had never undertaken to record those documents.

In 2003, the insured, Union Street Tower, entered into a purchase agreement covering a lot denominated as “Lot 4,” together with development rights over “Lot 1.” The parties to the agreement were the seller, who also owned Lot 1, and a party holding a mortgage on Lot 1. The agreement required seller to deliver a deed to Lot 4 and all documents necessary to convey the air rights over Lot 1, which included a “zoning declaration” defined in the purchase agreement, and a certification that the insured, the seller, and the mortgagee, were the only parties in interest affected by the transfer of air rights. This certification was executed by a Vice President of East Coast, as the authorized agent of Lawyers Title Insurance Co. Insured procured title insurance not from Lawyers Title, but from First American. East Coast acted as First American's agent in executing the title insurance policy. The policy itself insured the fee simple interest in Lot 4, but made no mention of the air rights over Lot 1.

East Coast recorded the deed to Lot 4, but waited nearly four years, until 2007, before recording the zoning declaration regarding the Lot 1 air rights. Then, in 2010, insured obtained a building permit for construction of a 40-unit 12-story building on Lot 4, based on the zoning declaration and the certification of interested parties. Later that year, the Department of Buildings revoked that building permit, contending that the list of parties in interest in the 2003 certification was not accurate at the time the zoning declaration was recorded. Apparently, a fee owner of Lot 1 and a mortgagee had acquired title after the 2003 transfer, but before the 2007 recordation. In addition, several parties apparently also had mortgages dating back to the 1980s.

Based on these facts, insured brought the instant action against East Coast and First American for breach of contract and negligence. First American moved to dismiss the complaint against it. In granting First American's motion, the court held that First American was not liable on the title insurance policy because the policy made no mention of Lot 1 or of air rights. The court also held that, for two separate reasons, First American was not liable for negligence in failing to promptly record the zoning declaration and certification. First, the insurer had never agreed to provide recording services and therefore could not be held liable for negligence in performing those services. Second, the failure to record was not the proximate cause of revocation of the building permit, because the facts reveal that the certification provided by East Coast was inaccurate even as of the time it was executed in 2003. And the documentary evidence established that East Coast did not execute the documents effectuating the transfer of air rights on behalf of First American, but rather on behalf of Lawyers Title.

COMMENT

When a title insurance policy imposes on a title insurer the duty to timely record, the insurer is liable for failure to timely record. In Surace v. Commonwealth Land Tit. Ins. Co., 62 AD3d 861, the court awarded summary judgment to insured mortgagee on its breach of contract claim when the title policy explicitly required the insurer to timely record insureds' mortgage, but insurer did not submit the document for recording for almost nine months. In the interim, mortgagor had conveyed another mortgage, which was promptly recorded, giving the junior mortgage priority over insured's mortgage. Even when the title insurance policy does not expressly impose an obligation to record, insured may be able to recover for breach of contract if the insured's failure to record triggers a breach of some other provision of the policy. For example, in Choudhary v. First Option Tit. Agency, 107 AD3d 657, the court denied the insurer's motion to dismiss a breach of contract claim when the insurance policy covered the risk that someone else had an interest in the property “on the Policy Date.” Although the insured received a deed on July 11, 2005, the title policy denominated Jan. 18, 2006 (the date the insurer actually recorded the deed) as the “Policy Date.” Because an intervening deed had been recorded on Nov. 22, 2005, the documentary evidence did not conclusively rebut the insured's claim that the insurer was liable under the terms of the policy.

If the insured cannot establish a breach of contract, insured can prevail on a negligence claim only if insured can show that the actions of the insurer or its agent established a duty, outside the contract, to timely record. If the insurer never agreed to perform recording services for the insured, late recording cannot serve as the basis for a negligence claim. For instance, in Crupi v. Newell and Talarico Tit. Agency, Inc., 14 Misc 3d 1225(A) [Sup Ct 2007], the court dismissed a claim for negligence where defendant insurer failed to record a spreader agreement in a timely manner. By contrast when, as in Gem Services of New York, Inc. v. United Gen. Tit. Ins. Co., 28 AD3d 516, the defendant insurer, through its agent, undertakes to record the plaintiff's mortgage but fails to do so in a timely manner, the insured “state[s] a cognizable cause of action to recover damages for negligence which is independent of the parties' contract of insurance.” Id. Similarly, in Crupi, t he court did not dismiss a negligence claim against the title insurer's agent, suggesting that a duty might have arisen because the agent customarily provided recording services to all its customers.

'

Deed in Chain of Title Procured by Fraud in the Factum

Williams v. Mentore

NYLJ 3/7/14, p. 23, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action to set aside two deeds and a mortgage on the ground of fraud, mortgagee appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that the mortgagee had not established that it was entitled to the protection of the recording act.

The 83-year-old current resident of the subject property purchased it in 1976. In January 2007, she executed a deed purporting to transfer the property to Bindra, and in October 2008, Bindra executed a deed purporting to transfer the property to London. The latter executed a mortgage in favor of the bank. In this action, plaintiff resident of the property sought to invalidate the two deeds and the mortgage, contending that they were procured by fraud. Supreme Court denied the bank's motion to dismiss the complaint.

In affirming, the Appellate Division first noted that section 266 of the Real Property Law protects subsequent purchasers for value unless the purchaser “had previous notice of the fraudulent intent of his ' grantor, or of the fraud rendering void the title of such grantee.”

In this case, however, the court held that the plaintiff resident's possession of the premises put the bank on inquiry notice of her potential right to the property. As a result, the bank was not entitled to dismissal of the complaint. The court then went on to note that RPL section 266 does not protect a subsequent purchaser for value when there has been fraud in the factum, because fraud in the factum renders the deed void, so that a subsequent purchaser or incumbrancer would receive nothing. Because there remain triable issues of fact about plaintiff resident's fraud claim, the bank was not entitled to dismissal of the complaint.

COMMENT

Prior New York cases have suggested that deeds procured by fraud in the factum should be treated like deeds procured by forgery: Subsequent purchasers relying on those deeds are not protected by the recording acts. See JP Morgan Chase Bank, Nat. Ass'n v. Kalpakis, 91 A.D.3d 722, 937 N.Y.S.2d 105 (2012) (in an action to void a mortgage based on forgery, mortgagee bank's interest would not be protected under RPL ' 266 if grantor's deed was procured by either fraud in the factum or forgery). Finding cases in which a deed is invalid for fraud in the factum, however, proves difficult. In dictum, courts have suggested that fraud in the factum is a defense exists when a misrepresentation causes the signor to misunderstand the nature of the legal document he is executing ' but not if the signor's reliance on the misrepresentation is negligent. For example, in Cash v. Titan Fin. Servs., Inc., 58 A.D.3d 785, 873 N.Y.S.2d 642 (2009), the court rejected a fraud in the factum defense when a signor who could read was misled into signing sales documents when he thought he was signing mortgage-refinancing documents. The court emphasized that the signor was neither prevented from reading the closing documents, nor told not to read them.

In contrast, when a signor is aware of the nature of the legal document he is signing, but signed it based on a misrepresentation of facts, the fraud is “fraud in the inducement,” and a subsequent purchaser's title will be protected under RPL ' 266. For example, in Retek v. 233 Associates, Inc., 41 Misc. 3d 1220(A) (N.Y. Sup. Ct. 2013), the court held that since the signor knew she was signing a deed, the subsequent encumbrancer was protected under RPL ' 266 even though the deed was tainted by fraudulent inducement. In that case, the grantor, purporting to be President of the corporate owner, executed a deed to herself. In fact, she was not President of the owner. She later executed a $450,000 mortgage to another company, which then assigned the mortgage to FNMA. Id. When the corporate owner's sole shareholder sought to invalidate the mortgage, the court rejected the claim, holding that the deed was procured by fraudulent inducement, rather than fraud in the factum, because the grantor signed her own name and misrepresented herself as the person signing the deed, with no deception as to the nature of the legal document. The court held that RPL ' 266 protected the mortgagee bank's title.

Violation of Restrictive Covenant Insufficient to Support Unjust Enrichment Claim

Leidel v. Annicelli

NYLJ 2/20/14, p. 25, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action by neighbor against landowner for unjust enrichment, constructive trust and quasi-contract, neighbor appealed from Supreme Court's grant of landowner's motion to dismiss the complaint.The Appellate Division affirmed, holding that the relationship of neighbors was insufficient to support a claim for unjust enrichment.

In 1998, landowner leased its property to Verizon for construction and operation of a cellular telephone facility. In 2000, neighbors and others brought an action to enforce restrictive covenants limiting use of landowner's property to residential development. In 2001, Supreme Court permanently enjoined violation of the covenants and directed landowner to remove the facility. The facility was not removed, however, until 2007. In 2010, neighbors brought this action for rents collected by landowner in violation of the covenants from the date the Court of Appeals affirmed Supreme Court's injunction until the date the facility was removed. Supreme Court granted landowner's motion to dismiss the complaint.

In affirming, the Appellate Division held that the relationship between abutting neighbors is not one that could have induced reliance or inducement, and therefore could not support an unjust enrichment claim. Moreover, although the court conceded that an eyesore could affect property values, the court noted that the complaint did not allege that the cellular facility affected the value of neighbors' property. The court then held that neighbors did not allege all of the elements necessary to sustain claims for constructive trust or quasi-contract.

COMMENT

The Restatement provides that a conscious wrongdoer who obtains a benefit by unauthorized interference with another's property interest will be required to disgorge all gains derived from the unlawful conduct. Restatement (Third) of Restitution and Unjust Enrichment ' 40 (“[A] conscious wrongdoer will be stripped of gains from unauthorized interference with another's property ' while the restitutionary liability of a defendant without fault will not exceed the value obtained in the transaction for which liability is imposed.”). New York Courts have adopted this principle in cases involving willful trespass. For example, in DeCamp v. Bullard, 159 N.Y. 450(1899), the court held that where trespassers used property owner's river to float logs to their mill, property owner was entitled to all gains derived from the unlawful conduct. The court stated that damages measured by what the property owner actually lost would incentivize trespassing rather than lawful contracting. Thus, the court concluded that damages for willful trespass should be measured by the benefit to the trespasser where property owner has not incurred a measurable loss. Id. at 28. By contrast, an inadvertent trespasser will not be required to disgorge all gains derived from interference with another's property. For example, in Salesian Soc., Inc. v. Vill. of Ellenville, 505 N.Y.S.2d 197, the court held that diminution of value was the appropriate measure of damages for a telephone company's inadvertent trespass resulting from confusion as to who owned title to the property.

However, at least one other New York court before Leidel has held that disgorgement of profits is not an appropriate remedy for a claim that landowner was unjustly enriched by the breach of a restrictive covenant. In New York City Econ. Dev. Corp. v. T.C. Foods Imp. & Exp. Co., Inc., 819 N.Y.S.2d 849aff'd, 847 N.Y.S.2d 669, plaintiff alleged that neighboring landowner was unjustly enriched by the construction and maintenance of an advertising billboard in violation of a restrictive covenant, and sought the disgorgement of profits made from the billboard's advertising revenue. The court held that plaintiff failed to establish a prima facie case for unjust enrichment because plaintiff had not shown that the neighboring landowners were enriched at the expense of plaintiff. Neither the court in T.C. Foods nor the court in Leidel attempted to explain why the disgorgement rule applicable in trespass cases should not also apply to cases involving violation of a restrictive covenant.

Title Insurer's Failure to Record

Union Street Tower LLC v. First American Title Company

42 Misc.3d 1229A

Supreme Ct., Kings Cty

(Rothenberg, J.)

In an action by insured against title insurer, the latter moved to dismiss the complaint. Supreme Court granted the motion, holding that the title insurance policy did not insure air rights acquired by the insured, and that title insurer was not negligent in failing to record relevant purchase documents because the insurer had never undertaken to record those documents.

In 2003, the insured, Union Street Tower, entered into a purchase agreement covering a lot denominated as “Lot 4,” together with development rights over “Lot 1.” The parties to the agreement were the seller, who also owned Lot 1, and a party holding a mortgage on Lot 1. The agreement required seller to deliver a deed to Lot 4 and all documents necessary to convey the air rights over Lot 1, which included a “zoning declaration” defined in the purchase agreement, and a certification that the insured, the seller, and the mortgagee, were the only parties in interest affected by the transfer of air rights. This certification was executed by a Vice President of East Coast, as the authorized agent of Lawyers Title Insurance Co. Insured procured title insurance not from Lawyers Title, but from First American. East Coast acted as First American's agent in executing the title insurance policy. The policy itself insured the fee simple interest in Lot 4, but made no mention of the air rights over Lot 1.

East Coast recorded the deed to Lot 4, but waited nearly four years, until 2007, before recording the zoning declaration regarding the Lot 1 air rights. Then, in 2010, insured obtained a building permit for construction of a 40-unit 12-story building on Lot 4, based on the zoning declaration and the certification of interested parties. Later that year, the Department of Buildings revoked that building permit, contending that the list of parties in interest in the 2003 certification was not accurate at the time the zoning declaration was recorded. Apparently, a fee owner of Lot 1 and a mortgagee had acquired title after the 2003 transfer, but before the 2007 recordation. In addition, several parties apparently also had mortgages dating back to the 1980s.

Based on these facts, insured brought the instant action against East Coast and First American for breach of contract and negligence. First American moved to dismiss the complaint against it. In granting First American's motion, the court held that First American was not liable on the title insurance policy because the policy made no mention of Lot 1 or of air rights. The court also held that, for two separate reasons, First American was not liable for negligence in failing to promptly record the zoning declaration and certification. First, the insurer had never agreed to provide recording services and therefore could not be held liable for negligence in performing those services. Second, the failure to record was not the proximate cause of revocation of the building permit, because the facts reveal that the certification provided by East Coast was inaccurate even as of the time it was executed in 2003. And the documentary evidence established that East Coast did not execute the documents effectuating the transfer of air rights on behalf of First American, but rather on behalf of Lawyers Title.

COMMENT

When a title insurance policy imposes on a title insurer the duty to timely record, the insurer is liable for failure to timely record. In Surace v. Commonwealth Land Tit. Ins. Co., 62 AD3d 861, the court awarded summary judgment to insured mortgagee on its breach of contract claim when the title policy explicitly required the insurer to timely record insureds' mortgage, but insurer did not submit the document for recording for almost nine months. In the interim, mortgagor had conveyed another mortgage, which was promptly recorded, giving the junior mortgage priority over insured's mortgage. Even when the title insurance policy does not expressly impose an obligation to record, insured may be able to recover for breach of contract if the insured's failure to record triggers a breach of some other provision of the policy. For example, in Choudhary v. First Option Tit. Agency, 107 AD3d 657, the court denied the insurer's motion to dismiss a breach of contract claim when the insurance policy covered the risk that someone else had an interest in the property “on the Policy Date.” Although the insured received a deed on July 11, 2005, the title policy denominated Jan. 18, 2006 (the date the insurer actually recorded the deed) as the “Policy Date.” Because an intervening deed had been recorded on Nov. 22, 2005, the documentary evidence did not conclusively rebut the insured's claim that the insurer was liable under the terms of the policy.

If the insured cannot establish a breach of contract, insured can prevail on a negligence claim only if insured can show that the actions of the insurer or its agent established a duty, outside the contract, to timely record. If the insurer never agreed to perform recording services for the insured, late recording cannot serve as the basis for a negligence claim. For instance, in Crupi v. Newell and Talarico Tit. Agency, Inc., 14 Misc 3d 1225(A) [Sup Ct 2007], the court dismissed a claim for negligence where defendant insurer failed to record a spreader agreement in a timely manner. By contrast when, as in Gem Services of New York, Inc. v. United Gen. Tit. Ins. Co., 28 AD3d 516, the defendant insurer, through its agent, undertakes to record the plaintiff's mortgage but fails to do so in a timely manner, the insured “state[s] a cognizable cause of action to recover damages for negligence which is independent of the parties' contract of insurance.” Id. Similarly, in Crupi, t he court did not dismiss a negligence claim against the title insurer's agent, suggesting that a duty might have arisen because the agent customarily provided recording services to all its customers.

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