Real Property Law

Unclean Hands Defense Not Available in Mortgage Foreclosure Action

Jiles v. Archer

NYLJ 4/4/14, p. 30, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action for a declaration that mortgagee bank had no interest in a residential property after purchasing it at a foreclosure sale, plaintiff appealed from Supreme Court's judgment, after a nonjury trial dismissed plaintiff's complaint. The Appellate Division reversed, holding that plaintiff had established that a deed in the bank's chain of title was forged, and holding that the doctrine of unclean hands did not bar plaintiff's claim.

In July 2002, plaintiff and her cousin, Wynn, entered into an arrangement under which plaintiff would purchase the subject property and obtain a bank mortgage, although Wynn would manage the property. Plaintiff contributed no money toward the purchase, did not visit the property, and authorized Wynn to make mortgage payments and collect and keep all rents. The mortgage was satisfied in 2004, without any payments by plaintiff. Two years later, defendant Archer obtained a forged deed, purportedly from plaintiff, conveying title to her. Archer obtained a $500,000 mortgage loan to finance the purchase, and subsequently defaulted. When U.S. Bank, as assignee of the mortgage loan, brought a foreclosure action against Archer, plaintiff brought this action for a declaration that she is the lawful owner. Meanwhile, U.S. Bank obtained a judgment of foreclosure and purchased the property at a foreclosure sale. Supreme Court dismissed plaintiff's complaint in this action, finding that the deed to Archer was a forgery, but that plaintiff's claim was barred by unclean hands.

In reversing, the Appellate Division held that the unclean hands defense was not available to the bank. First, the court held that the bank had not shown that plaintiff was guilty of any immoral or unconscionable conduct with respect to the 2002 loan. The court observed that there was no evidence of fraud with respect to that transaction, and that the loan was fully satisfied within two years. Moreover, the court indicated that because the bank had not shown any involvement by plaintiff in the 2006 forgery, the unclean hands doctrine would not bar plaintiff's claim in any event. As a result, plaintiff was entitled to a judgment that she is the owner of the property and that the bank has no interest in that property.

COMMENT

New York courts apply the doctrine of unclean hands as a defense to an equitable claim to real property cases when a party has committed an immoral, unconscionable act, and that act is directly related to the disputed property. See Dolny v. Borck , 61 A.D.3d 817, 877 N.Y.S.2d 223 (2d Dep't 2009) (unclean hands doctrine barred constructive trust claim over interest in real property due to voluntary participation in a scheme to purposefully evade creditors during a foreclosure).

When a party's bad conduct does not directly relate to the disputed property transaction, unclean hands is inapplicable. Thus, in Columbo v. Columbo, 50 A.D.3d 617, 856 N.Y.S.2d 159 (2d Dep't 2008), the court held that the unclean hands doctrine did not bar a constructive trust claim where a purchaser's immoral conduct was unrelated to his claim to the disputed property. Although he provided the funds to purchase the subject property, the purchaser employed a nominee to purchase the property for his girlfriend to keep the purchase from his wife. Id. I n rejecting the nominee's claim that purchaser's unclean hands barred his constructive trust claim, the court reasoned that the purchaser's secretive purchase of a house for his girlfriend was not directly related to his constructive trust claim over the property. Id. See also Goldberg v. Goldberg, 173 A.D.2d 679, 570 N.Y.S.2d 333 (2d Dep ' t 1991) (unclean hands does not apply where purchaser uses embezzled funds to pay for property because embezzlement does not directly relate to his right to partition in that property); see also Sutter v. Lane, 61 A.D.3d 1310, 878 N.Y.S.2d 471 (3d Dep't 2009) (unclean hands did not apply because real estate broker's alleged sexual harassment of his employer's staff was unrelated to his equitable claim to an interest in the employer's business).

Upon a court's finding that a party's conduct is directly related to disputed property, it will not apply the doctrine of unclean hands when that conduct is not immoral and unconscionable. Thus, in Frymer v. Bell, 9 9 A.D.2d 91, 472 N.Y.S.2d 622 (1984), the court held that a purchaser did not have unclean hands after negotiating with a 90-year-old to purchase an apartment for considerably below fair market value. In reversing an order for rescission, the court emphasized that there is “nothing illegal, immoral or unconscionable about trying to capitalize upon an advantageous offer.” Id.

Questions of Fact About Duty to Inquire

Wells Fargo, N.A. v. Savinetti

NYLJ 4/11/14, p. 24, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a senior mortgage and for a judgment declaring that the senior mortgage is a first lien against the subject property, junior mortgagees appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that questions of fact remained about whether junior mortgagees had a duty to inquire about the rights of the senior mortgagee.

In 2005, Savinetti, who owned lots 56 and 57, obtained a mortgage from senior mortgagee's assignor. Although the mortgage was promptly recorded, the mortgage documents indicated that the mortgage encumbered only lot 57. Then, in 2006, Savinetti obtained a $300,000 mortgage loan from junior mortgagees, secured by both lots 56 and 57. That mortgage was recorded on June 30, 2006. In 2007, senior mortgagee brought this action to foreclose its mortgage, and to reform the documents to cover both lots 56 and 57 on the ground of mutual mistake. Junior mortgagees moved for summary judgment dismissing the complaint against them, seeking a declaration that they have a first lien on lot 56, and awarding them judgment on their cross-claim against mortgagor Savinetti on the mortgage note. Supreme Court denied their motion, and they appealed.

In affirming, the Appellate Division first held that junior mortgagees were not entitled to summary judgment on their cross-claim because Savinetti had raised a triable issue of fact about whether the junior loan constituted a high-cost home loan, and, if so, whether the loan conformed to the statutory requirements for such a loan. The court then turned to mortgage priorities, and conceded that junior mortgagees had established a prima facie case that they enjoyed priority with respect to lot 56, by submitting evidence that they had lent in good faith and recording first. The court held, however, that senior mortgagee's submissions, including a title report obtained by junior mortgagees in connection with their mortgage loan, raised a triable issue of fact about whether junior mortgagees had a duty to inquire about whether the senior mortgage was intended to encumber both parcels, and not just lot 57.

COMMENT

New York courts will generally reform real property instruments as between the original parties where inaccuracy of the writing is due to a mutual mistake or a scrivener's error. In Carpenter v. Morrette, 36 A.D.3d 1115, the court held that transferees were entitled to reform a deed conveying one parcel to them to reflect that it contained two contiguous parcels where transferees were able to establish mutual mistake by submitting evidence that transferor acquired property by two separate conveyances, transferor told attorney who prepared conveyance that deed for unimproved parcel described his entire property, transferor did not include property in his will, and the property had been taxed as single property for approximately 50 years. In Miller v. Seibt, 13 A.D.3d 496, the court held that reformation was appropriate where clear and convincing evidence showed that intent of holder and grantors of the easement was for the easement to include the right to park in the easement area, and that the omission of that right in the deeds was due to a mistake of the scrivener.

Reformation will be granted as against subsequent purchasers who had notice of the existing mistake and are not considered bona fide purchasers for value. In De Peyster v. Hasbrouck, 11 N.Y. 582, mortgagor, by false representations, induced mortgagee to believe that certain property owned by mortgagor was part of the premises included in the mortgage. After mortgagee advanced the loan and accepted the mortgage, mortgagor conveyed the property, without consideration, to his wife. The Court of Appeals reformed the mortgage to include the property not originally embraced.

By contrast, courts will not grant reformation of an instrument if reformation would prejudice the rights of an innocent purchaser or mortgagee. For example, in Bartkowiak v. Kley, 9 NYS2d 986, mortgagor secured two mortgages intended to cover the same property, the first of which correctly described the property and a second mortgage, which contained an inaccurate property description failing to identify property owned by the mortgagor. The first mortgage was not recorded until after the recording of the second mortgage. The court held that although the assignees of the second mortgage were entitled to reformation of the erroneous property description, the assignees were not entitled to a declaration that their mortgage enjoyed priority over the earlier, subsequently recorded, mortgage.

Purchase Money Mortgagee Enjoys Priority over Other Liens

Wells Fargo Bank, N.A. v. Rottner

NYLJ 4/16/14, p. 21, col. 3

Supreme Ct., Essex Cty.

(Muller, J.)

In an action to foreclose a purchase money mortgage, subsequent mortgagee, who recorded before the purchase money mortgage was recorded, sought summary judgment declaring that his mortgage enjoyed priority over the purchase money mortgage. The court denied the motion, holding that a purchase money mortgage enjoys priority over all of the liens arising through the mortgagor.

In 2006, mortgagor obtained a mortgage loan from Option One Bank to finance purchase of a second home in Lake Placid. That mortgage was not recorded until December 2007. Meanwhile, in early 2007, mortgagor obtained a number of loans from his brother-in-law, Conroy, and on July 27, mortgagor executed the note and mortgage to Conroy in the amount of $250,000 to cover the $100,000 Conroy had previously advanced, and an additional $150,000 in future advances. That mortgage was recorded on Aug. 8, 2007.

Then, on Sept. 14, Conroy recorded an amended note and mortgage, executed on Sept. 7, reducing the maximum principal amount of the note from $250,000 to $125,000. Mortgagor subsequently defaulted on its payments on the purchase money mortgage, which Option One had assigned to Wells Fargo. The latter brought this foreclosure action in March 2008. Conroy moved for summary judgment, declaring that his mortgage has priority over the purchase money mortgage.

In denying Conroy's motion, the court held that a purchase-money mortgage enjoys priority over all other liens of any kind, even if those other liens are prior in time. Because the bank's mortgage was a purchase-money mortgage and Conroy's mortgage was not, Conroy was not entitled to priority. The court then noted that Conroy was not entitled to summary judgment in any event because Wells Fargo had raised issues of fact about whether Conroy had actual or constructive notice of the bank's mortgage, and about whether the mortgage was given for valuable consideration. Because Conroy was mortgagor's brother-in-law, the court indicated that it was “hard to imagine that he never so much as asked” how mortgagor had acquired the funds to purchase a second home. The court also suggested that because Conroy's mortgage was based on a prior debt, there remained a question of fact about whether the mortgage was given for valuable consideration.

COMMENT

Real Property Law section 291 provides that an unrecorded conveyance is void against a good-faith subsequent purchaser who first records. Despite the recording act, a vendor's purchase-money mortgage prevails over any other previously recorded mortgage, even though the recording act would appear to give priority to the previously recorded mortgage. Thus, the court in Giragosian v. Clement, 199 A.D.2d 656 held that a vendor's purchase-money mortgage had priority over a third-party lender's purchase-money mortgage although the third-party's mortgage was recorded a day earlier than the vendor's. The court reached its holding on the theory that “a vendor of real property has an equitable lien for the unpaid purchase price, and when the vendee gives a purchase-money mortgage the lien of such mortgage is substituted for the vendor's equitable lien.” The court in In re Smith, 2 88 B.R. 675, reached the same conclusion, stating that the third-party mortgage was not a “prior” lien, although recorded before the seller's purchase-money mortgage.

The rationale that a vendor's purchase money-mortgage enjoys priority over a third-party mortgage originated with the Court of Appeals opinion in Dusenbury v. Hulbert, 59 N.Y. 541. The court in Dusenbury concluded that “where, in pursuance of an executory contract of sale, lands are conveyed and at the same time a mortgage thereon given by the purchaser for a portion of the purchase-money” the deed and mortgage are to be construed together as one instrument, and therefore there can never occur a moment between the seisin and mortgage during which another mortgage can insert itself into the priority scheme. In Boies v. Benham, 127 N.Y. 60, the court applied the rule to a case in which a purchaser gave mortgages contemporaneously to a seller and a third party. Boies, the seller of real property, received a partial payment of cash and accepted a note for the balance of the consideration. At closing, the purchaser gave two mortgages: one to Boies to secure his note, and another to a third party to secure a loan of the money that became the source of the cash payment to Boies. In an action by Boies to foreclose his mortgage, the third party contended that her mortgage was a concurrent lien that was entitled to equal priority. The court rejected the third party's argument and held that a mortgage given to a seller as collateral for the unpaid purchase price will generally enjoy priority over any other contemporaneous mortgage, even one given to a third party to secure a loan for the balance of the cost of purchase, because in substance, it is a continuation of his pre-existing vendor's lien for unpaid purchase money.

No Private Right of Action Under HAMP

Davis v. Citibank, N.A.

NYLJ 4/18/14, p. 28, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In mortgagors' action for breach of contract and fraud, mortgagors appealed from a Supreme Court order dismissing the complaint. The Appellate Division affirmed, holding that no private right of action exists under the federal Home Affordable Modification Program (HAMP).

In 1990, mortgagors obtained a mortgage loan from Citimortgage. When they experienced financial difficulties in 2009, they entered into a trial period plan (TPP) agreement with Citimortgage in accordance with HAMP. The TPP permitted mortgagors to remit a reduced monthly payment for three months, and provided that if mortgagors met all HAMP requirements and remitted the payments, Citimortgage would offer a permanent HAMP loan modification, the details of which were absent from the TPP agreement. Citimortgage accepted reduced payments for well more than three months, but ultimately denied mortgagors' application for a permanent loan modification. Citimortgage then notified mortgagors that they were $34,673.19 in arrears.

Mortgagors filed for bankruptcy protection, listing the original mortgage, but not the TPP agreement. One year later, in May 2011, their bankruptcy petition was dismissed for failure to make plan payments. Then, in September 2011, mortgagor brought this action against Citibank and Citimortgage, alleging breach of the TPP agreement, together with fraud in the inducement, promissory estoppels and a violation of section 349 of the General Business Law. Supreme Court dismissed the complaint on the ground that mortgagors were judicially estopped by their failure to list the TPP agreement in the bankruptcy petition.

In affirming, the Appellate Division first held that the judicial estoppel doctrine was inapplicable because the Bankruptcy Court never awarded mortgagors a discharge, the court had had never endorsed the mortgagors' position. But the court held that Citimortgage and Citibank were nevertheless entitled to dismissal because no private right of action existed under HAMP. The court emphasized that HAMP was designed to incentivize mortgagees to participate, and recognizing a private right of action would deter lenders from participating.

No Duty to Disclose Flooding or Mechanical System Problems

Mo v. Rosen

NYLJ 4/28/14, p. 23, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In home purchaser's action against seller for fraud, purchaser appealed from Supreme Court's grant of summary judgment to seller. The Appellate Division affirmed, holding that purchasers had not raised questions of fact about whether seller had engaged in active concealment of defects.

Purchaser contracted to buy residential premises in 2010. After closing, purchaser became aware of flooding problems and also discovered that certain mechanical systems were not operating. In 2012, purchaser brought this action against seller for fraud, and Supreme Court awarded summary judgment.

In affirming, the Appellate Division noted that the doctrine of caveat emptor imposes no duty on seller to disclose information concerning the premises unless seller's conduct amounts to actual concealment. In this case, purchaser could point to no facts which would lead to a conclusion of actual concealment.

Issues of Fact About Anticipatory Breach

Taylor v. Carbone

NYLJ 4/11/14, p. 27, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In buyers' action for return of a down payment, seller appealed from Supreme Court's order denying their motion for summary judgment, dismissing the complaint and granting buyers' motion for summary judgment on the complaint. The Appellate Division affirmed the denial of summary judgment to seller, but reversed the grant of summary judgment to buyers, holding that buyers had failed to eliminate all triable issues of fact about whether they had anticipatorily breached the contract and whether seller could have remedied alleged defects in the premises.

In June, 2010, the parties entered into a contract for the sale of property, and buyer paid a $95,000 down payment. Closing was to be “on or about July 1, 2010.” The contract provided that if an inspection revealed a termite infestation, seller had the option of repairing the contract or, if the cost of repair exceeded $1,000, terminating the contract and refunding the down payment. The contract also provided that, as a condition of closing, seller would deliver valid certificates of occupancy covering the buildings and improvements, except that for certain structures that were not an integral part of the transaction, seller had the option to remove the structure rather than obtaining a certificate of occupancy.

Buyers' inspection revealed termite infestation and damage. Seller chose to treat the condition, for which they received a one-year termite warranty. Seller also received an estimate of $1,900 for repair of past termite damage. Buyers, however, provided seller with a repair estimate in the amount of $34,975 and asserted that seller was required to pay that amount. Seller, however, contended that buyers' estimate covered items not caused by termite damage. On July 18, 2010, buyers terminated the contract and demanded return of its down payment. Seller refused, notified buyer that time was of the essence, and set a closing date of Sept. 9. Buyers did not appear. In January 2011, they brought this action. Supreme Court awarded summary judgment to buyers on their claim for return of the down payment.

In holding that neither party was entitled to summary judgment, the court emphasized that seller had not established that he was ready, willing, and able to perform on the closing date, precluding an award of summary judgment to seller. The court then held that Supreme Court had improperly awarded summary judgment to buyer, because buyers had not established that their termination did not constitute anticipatory breach, and because buyers had not established that sellers would have been unable to remedy issues with respect to termites and a shed on the premises.

'

Unclean Hands Defense Not Available in Mortgage Foreclosure Action

Jiles v. Archer

NYLJ 4/4/14, p. 30, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In an action for a declaration that mortgagee bank had no interest in a residential property after purchasing it at a foreclosure sale, plaintiff appealed from Supreme Court's judgment, after a nonjury trial dismissed plaintiff's complaint. The Appellate Division reversed, holding that plaintiff had established that a deed in the bank's chain of title was forged, and holding that the doctrine of unclean hands did not bar plaintiff's claim.

In July 2002, plaintiff and her cousin, Wynn, entered into an arrangement under which plaintiff would purchase the subject property and obtain a bank mortgage, although Wynn would manage the property. Plaintiff contributed no money toward the purchase, did not visit the property, and authorized Wynn to make mortgage payments and collect and keep all rents. The mortgage was satisfied in 2004, without any payments by plaintiff. Two years later, defendant Archer obtained a forged deed, purportedly from plaintiff, conveying title to her. Archer obtained a $500,000 mortgage loan to finance the purchase, and subsequently defaulted. When U.S. Bank, as assignee of the mortgage loan, brought a foreclosure action against Archer, plaintiff brought this action for a declaration that she is the lawful owner. Meanwhile, U.S. Bank obtained a judgment of foreclosure and purchased the property at a foreclosure sale. Supreme Court dismissed plaintiff's complaint in this action, finding that the deed to Archer was a forgery, but that plaintiff's claim was barred by unclean hands.

In reversing, the Appellate Division held that the unclean hands defense was not available to the bank. First, the court held that the bank had not shown that plaintiff was guilty of any immoral or unconscionable conduct with respect to the 2002 loan. The court observed that there was no evidence of fraud with respect to that transaction, and that the loan was fully satisfied within two years. Moreover, the court indicated that because the bank had not shown any involvement by plaintiff in the 2006 forgery, the unclean hands doctrine would not bar plaintiff's claim in any event. As a result, plaintiff was entitled to a judgment that she is the owner of the property and that the bank has no interest in that property.

COMMENT

New York courts apply the doctrine of unclean hands as a defense to an equitable claim to real property cases when a party has committed an immoral, unconscionable act, and that act is directly related to the disputed property. See Dolny v. Borck , 61 A.D.3d 817, 877 N.Y.S.2d 223 (2d Dep't 2009) (unclean hands doctrine barred constructive trust claim over interest in real property due to voluntary participation in a scheme to purposefully evade creditors during a foreclosure).

When a party's bad conduct does not directly relate to the disputed property transaction, unclean hands is inapplicable. Thus, in Columbo v. Columbo, 50 A.D.3d 617, 856 N.Y.S.2d 159 (2d Dep't 2008), the court held that the unclean hands doctrine did not bar a constructive trust claim where a purchaser's immoral conduct was unrelated to his claim to the disputed property. Although he provided the funds to purchase the subject property, the purchaser employed a nominee to purchase the property for his girlfriend to keep the purchase from his wife. Id. I n rejecting the nominee's claim that purchaser's unclean hands barred his constructive trust claim, the court reasoned that the purchaser's secretive purchase of a house for his girlfriend was not directly related to his constructive trust claim over the property. Id. See also Goldberg v. Goldberg, 173 A.D.2d 679, 570 N.Y.S.2d 333 (2d Dep ' t 1991) (unclean hands does not apply where purchaser uses embezzled funds to pay for property because embezzlement does not directly relate to his right to partition in that property); see also Sutter v. Lane, 61 A.D.3d 1310, 878 N.Y.S.2d 471 (3d Dep't 2009) (unclean hands did not apply because real estate broker's alleged sexual harassment of his employer's staff was unrelated to his equitable claim to an interest in the employer's business).

Upon a court's finding that a party's conduct is directly related to disputed property, it will not apply the doctrine of unclean hands when that conduct is not immoral and unconscionable. Thus, in Frymer v. Bell, 9 9 A.D.2d 91, 472 N.Y.S.2d 622 (1984), the court held that a purchaser did not have unclean hands after negotiating with a 90-year-old to purchase an apartment for considerably below fair market value. In reversing an order for rescission, the court emphasized that there is “nothing illegal, immoral or unconscionable about trying to capitalize upon an advantageous offer.” Id.

Questions of Fact About Duty to Inquire

Wells Fargo, N.A. v. Savinetti

NYLJ 4/11/14, p. 24, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a senior mortgage and for a judgment declaring that the senior mortgage is a first lien against the subject property, junior mortgagees appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that questions of fact remained about whether junior mortgagees had a duty to inquire about the rights of the senior mortgagee.

In 2005, Savinetti, who owned lots 56 and 57, obtained a mortgage from senior mortgagee's assignor. Although the mortgage was promptly recorded, the mortgage documents indicated that the mortgage encumbered only lot 57. Then, in 2006, Savinetti obtained a $300,000 mortgage loan from junior mortgagees, secured by both lots 56 and 57. That mortgage was recorded on June 30, 2006. In 2007, senior mortgagee brought this action to foreclose its mortgage, and to reform the documents to cover both lots 56 and 57 on the ground of mutual mistake. Junior mortgagees moved for summary judgment dismissing the complaint against them, seeking a declaration that they have a first lien on lot 56, and awarding them judgment on their cross-claim against mortgagor Savinetti on the mortgage note. Supreme Court denied their motion, and they appealed.

In affirming, the Appellate Division first held that junior mortgagees were not entitled to summary judgment on their cross-claim because Savinetti had raised a triable issue of fact about whether the junior loan constituted a high-cost home loan, and, if so, whether the loan conformed to the statutory requirements for such a loan. The court then turned to mortgage priorities, and conceded that junior mortgagees had established a prima facie case that they enjoyed priority with respect to lot 56, by submitting evidence that they had lent in good faith and recording first. The court held, however, that senior mortgagee's submissions, including a title report obtained by junior mortgagees in connection with their mortgage loan, raised a triable issue of fact about whether junior mortgagees had a duty to inquire about whether the senior mortgage was intended to encumber both parcels, and not just lot 57.

COMMENT

New York courts will generally reform real property instruments as between the original parties where inaccuracy of the writing is due to a mutual mistake or a scrivener's error. In Carpenter v. Morrette, 36 A.D.3d 1115, the court held that transferees were entitled to reform a deed conveying one parcel to them to reflect that it contained two contiguous parcels where transferees were able to establish mutual mistake by submitting evidence that transferor acquired property by two separate conveyances, transferor told attorney who prepared conveyance that deed for unimproved parcel described his entire property, transferor did not include property in his will, and the property had been taxed as single property for approximately 50 years. In Miller v. Seibt, 13 A.D.3d 496, the court held that reformation was appropriate where clear and convincing evidence showed that intent of holder and grantors of the easement was for the easement to include the right to park in the easement area, and that the omission of that right in the deeds was due to a mistake of the scrivener.

Reformation will be granted as against subsequent purchasers who had notice of the existing mistake and are not considered bona fide purchasers for value. In De Peyster v. Hasbrouck, 11 N.Y. 582, mortgagor, by false representations, induced mortgagee to believe that certain property owned by mortgagor was part of the premises included in the mortgage. After mortgagee advanced the loan and accepted the mortgage, mortgagor conveyed the property, without consideration, to his wife. The Court of Appeals reformed the mortgage to include the property not originally embraced.

By contrast, courts will not grant reformation of an instrument if reformation would prejudice the rights of an innocent purchaser or mortgagee. For example, in Bartkowiak v. Kley, 9 NYS2d 986, mortgagor secured two mortgages intended to cover the same property, the first of which correctly described the property and a second mortgage, which contained an inaccurate property description failing to identify property owned by the mortgagor. The first mortgage was not recorded until after the recording of the second mortgage. The court held that although the assignees of the second mortgage were entitled to reformation of the erroneous property description, the assignees were not entitled to a declaration that their mortgage enjoyed priority over the earlier, subsequently recorded, mortgage.

Purchase Money Mortgagee Enjoys Priority over Other Liens

Wells Fargo Bank, N.A. v. Rottner

NYLJ 4/16/14, p. 21, col. 3

Supreme Ct., Essex Cty.

(Muller, J.)

In an action to foreclose a purchase money mortgage, subsequent mortgagee, who recorded before the purchase money mortgage was recorded, sought summary judgment declaring that his mortgage enjoyed priority over the purchase money mortgage. The court denied the motion, holding that a purchase money mortgage enjoys priority over all of the liens arising through the mortgagor.

In 2006, mortgagor obtained a mortgage loan from Option One Bank to finance purchase of a second home in Lake Placid. That mortgage was not recorded until December 2007. Meanwhile, in early 2007, mortgagor obtained a number of loans from his brother-in-law, Conroy, and on July 27, mortgagor executed the note and mortgage to Conroy in the amount of $250,000 to cover the $100,000 Conroy had previously advanced, and an additional $150,000 in future advances. That mortgage was recorded on Aug. 8, 2007.

Then, on Sept. 14, Conroy recorded an amended note and mortgage, executed on Sept. 7, reducing the maximum principal amount of the note from $250,000 to $125,000. Mortgagor subsequently defaulted on its payments on the purchase money mortgage, which Option One had assigned to Wells Fargo. The latter brought this foreclosure action in March 2008. Conroy moved for summary judgment, declaring that his mortgage has priority over the purchase money mortgage.

In denying Conroy's motion, the court held that a purchase-money mortgage enjoys priority over all other liens of any kind, even if those other liens are prior in time. Because the bank's mortgage was a purchase-money mortgage and Conroy's mortgage was not, Conroy was not entitled to priority. The court then noted that Conroy was not entitled to summary judgment in any event because Wells Fargo had raised issues of fact about whether Conroy had actual or constructive notice of the bank's mortgage, and about whether the mortgage was given for valuable consideration. Because Conroy was mortgagor's brother-in-law, the court indicated that it was “hard to imagine that he never so much as asked” how mortgagor had acquired the funds to purchase a second home. The court also suggested that because Conroy's mortgage was based on a prior debt, there remained a question of fact about whether the mortgage was given for valuable consideration.

COMMENT

Real Property Law section 291 provides that an unrecorded conveyance is void against a good-faith subsequent purchaser who first records. Despite the recording act, a vendor's purchase-money mortgage prevails over any other previously recorded mortgage, even though the recording act would appear to give priority to the previously recorded mortgage. Thus, the court in Giragosian v. Clement, 199 A.D.2d 656 held that a vendor's purchase-money mortgage had priority over a third-party lender's purchase-money mortgage although the third-party's mortgage was recorded a day earlier than the vendor's. The court reached its holding on the theory that “a vendor of real property has an equitable lien for the unpaid purchase price, and when the vendee gives a purchase-money mortgage the lien of such mortgage is substituted for the vendor's equitable lien.” The court in In re Smith, 2 88 B.R. 675, reached the same conclusion, stating that the third-party mortgage was not a “prior” lien, although recorded before the seller's purchase-money mortgage.

The rationale that a vendor's purchase money-mortgage enjoys priority over a third-party mortgage originated with the Court of Appeals opinion in Dusenbury v. Hulbert, 59 N.Y. 541. The court in Dusenbury concluded that “where, in pursuance of an executory contract of sale, lands are conveyed and at the same time a mortgage thereon given by the purchaser for a portion of the purchase-money” the deed and mortgage are to be construed together as one instrument, and therefore there can never occur a moment between the seisin and mortgage during which another mortgage can insert itself into the priority scheme. In Boies v. Benham, 127 N.Y. 60, the court applied the rule to a case in which a purchaser gave mortgages contemporaneously to a seller and a third party. Boies, the seller of real property, received a partial payment of cash and accepted a note for the balance of the consideration. At closing, the purchaser gave two mortgages: one to Boies to secure his note, and another to a third party to secure a loan of the money that became the source of the cash payment to Boies. In an action by Boies to foreclose his mortgage, the third party contended that her mortgage was a concurrent lien that was entitled to equal priority. The court rejected the third party's argument and held that a mortgage given to a seller as collateral for the unpaid purchase price will generally enjoy priority over any other contemporaneous mortgage, even one given to a third party to secure a loan for the balance of the cost of purchase, because in substance, it is a continuation of his pre-existing vendor's lien for unpaid purchase money.

No Private Right of Action Under HAMP

Davis v. Citibank, N.A.

NYLJ 4/18/14, p. 28, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In mortgagors' action for breach of contract and fraud, mortgagors appealed from a Supreme Court order dismissing the complaint. The Appellate Division affirmed, holding that no private right of action exists under the federal Home Affordable Modification Program (HAMP).

In 1990, mortgagors obtained a mortgage loan from Citimortgage. When they experienced financial difficulties in 2009, they entered into a trial period plan (TPP) agreement with Citimortgage in accordance with HAMP. The TPP permitted mortgagors to remit a reduced monthly payment for three months, and provided that if mortgagors met all HAMP requirements and remitted the payments, Citimortgage would offer a permanent HAMP loan modification, the details of which were absent from the TPP agreement. Citimortgage accepted reduced payments for well more than three months, but ultimately denied mortgagors' application for a permanent loan modification. Citimortgage then notified mortgagors that they were $34,673.19 in arrears.

Mortgagors filed for bankruptcy protection, listing the original mortgage, but not the TPP agreement. One year later, in May 2011, their bankruptcy petition was dismissed for failure to make plan payments. Then, in September 2011, mortgagor brought this action against Citibank and Citimortgage, alleging breach of the TPP agreement, together with fraud in the inducement, promissory estoppels and a violation of section 349 of the General Business Law. Supreme Court dismissed the complaint on the ground that mortgagors were judicially estopped by their failure to list the TPP agreement in the bankruptcy petition.

In affirming, the Appellate Division first held that the judicial estoppel doctrine was inapplicable because the Bankruptcy Court never awarded mortgagors a discharge, the court had had never endorsed the mortgagors' position. But the court held that Citimortgage and Citibank were nevertheless entitled to dismissal because no private right of action existed under HAMP. The court emphasized that HAMP was designed to incentivize mortgagees to participate, and recognizing a private right of action would deter lenders from participating.

No Duty to Disclose Flooding or Mechanical System Problems

Mo v. Rosen

NYLJ 4/28/14, p. 23, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In home purchaser's action against seller for fraud, purchaser appealed from Supreme Court's grant of summary judgment to seller. The Appellate Division affirmed, holding that purchasers had not raised questions of fact about whether seller had engaged in active concealment of defects.

Purchaser contracted to buy residential premises in 2010. After closing, purchaser became aware of flooding problems and also discovered that certain mechanical systems were not operating. In 2012, purchaser brought this action against seller for fraud, and Supreme Court awarded summary judgment.

In affirming, the Appellate Division noted that the doctrine of caveat emptor imposes no duty on seller to disclose information concerning the premises unless seller's conduct amounts to actual concealment. In this case, purchaser could point to no facts which would lead to a conclusion of actual concealment.

Issues of Fact About Anticipatory Breach

Taylor v. Carbone

NYLJ 4/11/14, p. 27, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In buyers' action for return of a down payment, seller appealed from Supreme Court's order denying their motion for summary judgment, dismissing the complaint and granting buyers' motion for summary judgment on the complaint. The Appellate Division affirmed the denial of summary judgment to seller, but reversed the grant of summary judgment to buyers, holding that buyers had failed to eliminate all triable issues of fact about whether they had anticipatorily breached the contract and whether seller could have remedied alleged defects in the premises.

In June, 2010, the parties entered into a contract for the sale of property, and buyer paid a $95,000 down payment. Closing was to be “on or about July 1, 2010.” The contract provided that if an inspection revealed a termite infestation, seller had the option of repairing the contract or, if the cost of repair exceeded $1,000, terminating the contract and refunding the down payment. The contract also provided that, as a condition of closing, seller would deliver valid certificates of occupancy covering the buildings and improvements, except that for certain structures that were not an integral part of the transaction, seller had the option to remove the structure rather than obtaining a certificate of occupancy.

Buyers' inspection revealed termite infestation and damage. Seller chose to treat the condition, for which they received a one-year termite warranty. Seller also received an estimate of $1,900 for repair of past termite damage. Buyers, however, provided seller with a repair estimate in the amount of $34,975 and asserted that seller was required to pay that amount. Seller, however, contended that buyers' estimate covered items not caused by termite damage. On July 18, 2010, buyers terminated the contract and demanded return of its down payment. Seller refused, notified buyer that time was of the essence, and set a closing date of Sept. 9. Buyers did not appear. In January 2011, they brought this action. Supreme Court awarded summary judgment to buyers on their claim for return of the down payment.

In holding that neither party was entitled to summary judgment, the court emphasized that seller had not established that he was ready, willing, and able to perform on the closing date, precluding an award of summary judgment to seller. The court then held that Supreme Court had improperly awarded summary judgment to buyer, because buyers had not established that their termination did not constitute anticipatory breach, and because buyers had not established that sellers would have been unable to remedy issues with respect to termites and a shed on the premises.

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