Real Property Law

Deed Intended As Security Not Enforceable

Patmos Fifth Real Estate Inc. v. Mazl Building, LLC

NYLJ 1/12/15, p. 18, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action by grantor of a deed for a violation of Real Property Law section 320 and for unjust enrichment, grantees appealed from Supreme Court's denial of their motion to dismiss. The Appellate Division affirmed, holding that grantor had sufficiently alleged that the deed was intended only as security in the nature of a mortgage.

Grantor purchased the subject apartment building from grantees in June 2006 in order to renovate the building into luxury condominium apartments and a restaurant. Grantor executed a mortgage note, promising to pay $9,350,000 by December 2007. Grantor executed a second note, for $1 million, also secured by the property, in December 2007. In January 2008, grantor borrowed an additional $5,650,000 from one of the grantees, and the parties consolidated the three mortgages into a single $16 million mortgage, with the balance to be paid in full by Dec. 31, 2008. On Feb. 27, 2009, the parties extended the maturity date until Oct. 1, 2009, with an option for an additional extension until June 30, 2010 if grantor repaid $2,500,000 by Oct. 1, 2009. This extension agreement also required grantor to execute a deed conveying the building to grantee and another party, with the deed to be held in escrow by grantee's counsel, to be released if grantor did not make any of the payments required on Oct. 1, 2009 or June 30, 2010. In the agreement, grantor was referred to as “borrower” and grantee was referred to as “lender.” Grantor defaulted on the payments, and grantee's lawyer released the deed from escrow and recorded the deed. Grantee then completed construction and sold some of the condominium units. Grantor brought this action contending that release and recording of the deed violated Real Property law section 320, which would treat the deed as a mortgage and require a foreclosure action. Supreme Court denied grantees' motion to dismiss, and grantees appealed.

In affirming, the Appellate Division started with the language of section 320, which provides that a deed which “appears to be intended only as a security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.” The statute goes on to hold that the party “for whose benefit such deed is made derives no advantage from the recording thereof” unless all writings which might explain that the deed was intended as a mortgage are recorded at the same time. In light of that language, the court concluded that grantor had adequately stated a cause of action for violation of the statute. Moreover, the court rejected grantees' argument that the February 2009 agreement was a “deed in lieu of foreclosure,” emphasizing that the agreement reflected an extension of the deadline for payment of the loan, not an absolute conveyance of the subject property. The court went on to hold that parol evidence would be admissible at the summary judgment or trial state go determine whether the deed was, in fact, intended as security for the mortgage debt.

COMMENT

If the circumstances surrounding the transfer of a deed create an appearance that the deed was intended as security for a performance of an obligation, and not as an absolute conveyance, then under Real Property Law ' 320, the deed is invalid.

A deed appears to be intended as security if the parties agree that the deed, held in escrow, will be recorded if the transferor fails to perform an obligation. In Vitvitsky v. Heim, 52 A.D.3d 1103, the court invalidated a deed under ' 320 because the transfer agreement included express, specific language authorizing release and recordation of the deed in the event of a default. A settlement established that the judgment creditor would hold a lien against the judgment debtor's real property, that the judgment debtor would execute a deed to the property, that the deed would be held in escrow, and that the judgment creditor would not foreclose on the lien or release the deed from escrow and record it, so long as the judgment debtor satisfied certain obligations. When judgment debtor thereafter defaulted and judgment creditor released and recorded the deed, the court held the deed ineffective to convey title.

Real Property Law ' 320 does not prevent a lender from accepting a deed in lieu of foreclosure if the deed is intended as a contemporaneous, absolute conveyance, and is transferred without conditions providing for reversion of ownership to the borrower upon fulfillment of obligations; however, if a deed otherwise resembles a security, merely referring to it as a “deed in lieu of foreclosure” does not defeat ' 320 and the deed will be invalidated and treated as a security. In Basile v. Erhal Holding Co., 148 A.D.2d 484, the court held that a purported deed in lieu of foreclosure was invalid because the parties did not intend for it to function as “an absolute conveyance or sale of the property ' but rather was intended to be a security.” As part of a settlement the mortgagee advanced funds in exchange for a deed, said to be a deed in lieu of foreclosure, which would be recorded only if the mortgagor failed to meet certain obligations.

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Questions of Fact Preclude Summary Judgment

Mau v. Schusler

NYLJ 1/21/15, p. 21, col. 3

AppDiv, Fourth Dept.

(3-2 decision; per curiam opinion; dissenting memorandum by Smith, J.P., and Lindley, J.)

In landowners' action for a judgment that they have an easement to a 195-square foot turnaround and parking space on their neighbors' lot, neighbors appealed from Supreme Court's denial of their summary judgment motion. A divided Appellate Division modified to grant the motion with respect to landowners' claims for an express easement, an easement by implication, and an easement by necessity, but held that the motion was properly denied with respect to landowners' easement by prescription claim.

Landowners and neighbors share a common driveway located entirely on landowners' parcel. Neighbors have an express easement to use the driveway for access. The two parcels were originally held in common ownership. Landowners contend that because the turnaround existed at the time the parcels were severed, landowners obtained an easement to use the turnaround.

The Appellate Division began by holding that Supreme Court should have granted summary judgment dismissing landowners' claim for an implied easement. The court indicated that neighbors had met their burden of establishing that, at severance, the use of the turnaround was not so manifest as to indicate that it was meant to be permanent. The court emphasized that in any event, neighbors had demonstrated that the use of the turnaround to facilitate access to offstreet parking was a mere convenience, not a reasonable necessity, precluding any implied easement claim. The same lack of necessity was also a bar to the easement by necessity claim, especially since landowners' primary allegation was that it would be too expensive for them to build a turnaround on their own parcel. The court also held that neighbors were entitled to summary judgment on the express easement claim because the deed to landowners included no language expressing an intent to create an easement.

The court's majority then held that Supreme Court had correctly denied neighbors' summary judgment motion on landowners' easement by prescription claim. The majority indicated that landowners had raised questions of fact about whether their use of the turnaround was under a claim of right by submitting an affidavit stating that, at the time of purchase, they were advised by their lawyer that neighbors could not interfere with landowners' use of the turnaround. The dissenting justices emphasized, however, that in the deposition testimony of the owner who submitted the affidavit, she had said that “nothing was said one way or the other” about their continued right to use the turnaround. In light of the deposition testimony, the dissenters concluded that landowners had not met their burden of raising an issue of fact, leading the dissenters to conclude that landowners' use was permissive as a matter of law.

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Mortgagee Bank Lacks Standing to Foreclose Because MERS Had No Authority to Assign Note

Citibank, N.A. v. Herman

NYLJ 2/6/15, p. 31, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In mortgagee bank's action to foreclose a mortgage, mortgagors appealed from Supreme Court's denial of their summary judgment motion. The Appellate Division reversed, holding that the bank failed to establish standing to foreclose.

In its complaint, Citibank alleged that it obtained its right to foreclose through an assignment of the mortgage and note from Mortgage Electronic Registration Services, Inc. (MERS). In response, mortgagors made out a prima facie case that MERS was never the holder of the note and that MERS therefore had no authority to assign the note to Citibank. The bank attempted to rebut the prima facie case by submitting a copy of the note. On this basis, Supreme Court denied mortgagors' summary judgment motion.

In reversing, the Appellate Division emphasized that Citibank failed to establish that the note had been delivered to MERS prior to execution of the assignment, and failed to raise a triable issue of fact about whether Citibank was the holder of the note at the time it commenced the foreclosure action. As a result, the court dismissed the complaint for lack of standing and cancelled the notice of pendency filed by Citibank.

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No Requirement for Mortgagee to File Affirmation for an Order of Reference

U.S. Bank, N.A. v. Ramjit

NYLJ 2/6/15, p. 27, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In mortgagee bank's foreclosure action, mortgagee appealed from Supreme Court's sua sponte dismissal of the complaint. The Appellate Division reversed, holding that the Administrative Order issued by the Chief Judge, requiring an attorney's affirmation, did not require the require filing of the affirmation to applications for an order of reference made before the Administrative Order was issued.

Mortgagee bank brought this foreclosure action in 2008, alleging that mortgagor had defaulted by failing to make payments. Mortgagor did not appear and, on July 9, 2009, mortgagee bank moved for an order of reference. Two years later, in July 2011, Supreme Court ordered mortgagee bank to file an attorney's affirmation in accordance with the Chief Judge's Administrative Order, which had been issued on Oct. 20, 2010 (and which, in 2011, was replaced by another order). Supreme Court indicated that the complaint would be dismissed if mortgagee bank did not file the affirmation within 60 days. Mortgagee bank renewed its motion for an order of reference in September 2011, without filing the attorney's affirmation. Supreme Court then dismissed the foreclosure action with prejudice, and cancelled mortgagee bank's notice of pendency. Mortgagee appealed.

In reversing, the Appellate Division acknowledged that the Administrative Order requires counsel for the mortgagee in a residential foreclosure proceeding to file an affirmation confirming the accuracy of the pleadings. But the Administrative Order also provides, with respect to pending applications, that the affirmation must be filed at the time of filing “either the proposed order of reference or the proposed judgment of foreclosure.” The court held that in this case, where the proposed order of reference was filed before issuance of the Administrative Order, the mortgagee bank was not required to file the affirmation to accompany the proposed order of reference. Instead, the bank was not required to file the affirmation until it files a proposed judgment of foreclosure. As a result, Supreme Court erroneously dismissed the complaint and cancelled the notice of pendency. The Appellate Division remanded to Supreme Court for further proceedings before a different justice.

'

Deed Intended As Security Not Enforceable

Patmos Fifth Real Estate Inc. v. Mazl Building, LLC

NYLJ 1/12/15, p. 18, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action by grantor of a deed for a violation of Real Property Law section 320 and for unjust enrichment, grantees appealed from Supreme Court's denial of their motion to dismiss. The Appellate Division affirmed, holding that grantor had sufficiently alleged that the deed was intended only as security in the nature of a mortgage.

Grantor purchased the subject apartment building from grantees in June 2006 in order to renovate the building into luxury condominium apartments and a restaurant. Grantor executed a mortgage note, promising to pay $9,350,000 by December 2007. Grantor executed a second note, for $1 million, also secured by the property, in December 2007. In January 2008, grantor borrowed an additional $5,650,000 from one of the grantees, and the parties consolidated the three mortgages into a single $16 million mortgage, with the balance to be paid in full by Dec. 31, 2008. On Feb. 27, 2009, the parties extended the maturity date until Oct. 1, 2009, with an option for an additional extension until June 30, 2010 if grantor repaid $2,500,000 by Oct. 1, 2009. This extension agreement also required grantor to execute a deed conveying the building to grantee and another party, with the deed to be held in escrow by grantee's counsel, to be released if grantor did not make any of the payments required on Oct. 1, 2009 or June 30, 2010. In the agreement, grantor was referred to as “borrower” and grantee was referred to as “lender.” Grantor defaulted on the payments, and grantee's lawyer released the deed from escrow and recorded the deed. Grantee then completed construction and sold some of the condominium units. Grantor brought this action contending that release and recording of the deed violated Real Property law section 320, which would treat the deed as a mortgage and require a foreclosure action. Supreme Court denied grantees' motion to dismiss, and grantees appealed.

In affirming, the Appellate Division started with the language of section 320, which provides that a deed which “appears to be intended only as a security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.” The statute goes on to hold that the party “for whose benefit such deed is made derives no advantage from the recording thereof” unless all writings which might explain that the deed was intended as a mortgage are recorded at the same time. In light of that language, the court concluded that grantor had adequately stated a cause of action for violation of the statute. Moreover, the court rejected grantees' argument that the February 2009 agreement was a “deed in lieu of foreclosure,” emphasizing that the agreement reflected an extension of the deadline for payment of the loan, not an absolute conveyance of the subject property. The court went on to hold that parol evidence would be admissible at the summary judgment or trial state go determine whether the deed was, in fact, intended as security for the mortgage debt.

COMMENT

If the circumstances surrounding the transfer of a deed create an appearance that the deed was intended as security for a performance of an obligation, and not as an absolute conveyance, then under Real Property Law ' 320, the deed is invalid.

A deed appears to be intended as security if the parties agree that the deed, held in escrow, will be recorded if the transferor fails to perform an obligation. In Vitvitsky v. Heim, 52 A.D.3d 1103, the court invalidated a deed under ' 320 because the transfer agreement included express, specific language authorizing release and recordation of the deed in the event of a default. A settlement established that the judgment creditor would hold a lien against the judgment debtor's real property, that the judgment debtor would execute a deed to the property, that the deed would be held in escrow, and that the judgment creditor would not foreclose on the lien or release the deed from escrow and record it, so long as the judgment debtor satisfied certain obligations. When judgment debtor thereafter defaulted and judgment creditor released and recorded the deed, the court held the deed ineffective to convey title.

Real Property Law ' 320 does not prevent a lender from accepting a deed in lieu of foreclosure if the deed is intended as a contemporaneous, absolute conveyance, and is transferred without conditions providing for reversion of ownership to the borrower upon fulfillment of obligations; however, if a deed otherwise resembles a security, merely referring to it as a “deed in lieu of foreclosure” does not defeat ' 320 and the deed will be invalidated and treated as a security. In Basile v. Erhal Holding Co., 148 A.D.2d 484, the court held that a purported deed in lieu of foreclosure was invalid because the parties did not intend for it to function as “an absolute conveyance or sale of the property ' but rather was intended to be a security.” As part of a settlement the mortgagee advanced funds in exchange for a deed, said to be a deed in lieu of foreclosure, which would be recorded only if the mortgagor failed to meet certain obligations.

'

Questions of Fact Preclude Summary Judgment

Mau v. Schusler

NYLJ 1/21/15, p. 21, col. 3

AppDiv, Fourth Dept.

(3-2 decision; per curiam opinion; dissenting memorandum by Smith, J.P., and Lindley, J.)

In landowners' action for a judgment that they have an easement to a 195-square foot turnaround and parking space on their neighbors' lot, neighbors appealed from Supreme Court's denial of their summary judgment motion. A divided Appellate Division modified to grant the motion with respect to landowners' claims for an express easement, an easement by implication, and an easement by necessity, but held that the motion was properly denied with respect to landowners' easement by prescription claim.

Landowners and neighbors share a common driveway located entirely on landowners' parcel. Neighbors have an express easement to use the driveway for access. The two parcels were originally held in common ownership. Landowners contend that because the turnaround existed at the time the parcels were severed, landowners obtained an easement to use the turnaround.

The Appellate Division began by holding that Supreme Court should have granted summary judgment dismissing landowners' claim for an implied easement. The court indicated that neighbors had met their burden of establishing that, at severance, the use of the turnaround was not so manifest as to indicate that it was meant to be permanent. The court emphasized that in any event, neighbors had demonstrated that the use of the turnaround to facilitate access to offstreet parking was a mere convenience, not a reasonable necessity, precluding any implied easement claim. The same lack of necessity was also a bar to the easement by necessity claim, especially since landowners' primary allegation was that it would be too expensive for them to build a turnaround on their own parcel. The court also held that neighbors were entitled to summary judgment on the express easement claim because the deed to landowners included no language expressing an intent to create an easement.

The court's majority then held that Supreme Court had correctly denied neighbors' summary judgment motion on landowners' easement by prescription claim. The majority indicated that landowners had raised questions of fact about whether their use of the turnaround was under a claim of right by submitting an affidavit stating that, at the time of purchase, they were advised by their lawyer that neighbors could not interfere with landowners' use of the turnaround. The dissenting justices emphasized, however, that in the deposition testimony of the owner who submitted the affidavit, she had said that “nothing was said one way or the other” about their continued right to use the turnaround. In light of the deposition testimony, the dissenters concluded that landowners had not met their burden of raising an issue of fact, leading the dissenters to conclude that landowners' use was permissive as a matter of law.

'

Mortgagee Bank Lacks Standing to Foreclose Because MERS Had No Authority to Assign Note

Citibank, N.A. v. Herman

NYLJ 2/6/15, p. 31, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In mortgagee bank's action to foreclose a mortgage, mortgagors appealed from Supreme Court's denial of their summary judgment motion. The Appellate Division reversed, holding that the bank failed to establish standing to foreclose.

In its complaint, Citibank alleged that it obtained its right to foreclose through an assignment of the mortgage and note from Mortgage Electronic Registration Services, Inc. (MERS). In response, mortgagors made out a prima facie case that MERS was never the holder of the note and that MERS therefore had no authority to assign the note to Citibank. The bank attempted to rebut the prima facie case by submitting a copy of the note. On this basis, Supreme Court denied mortgagors' summary judgment motion.

In reversing, the Appellate Division emphasized that Citibank failed to establish that the note had been delivered to MERS prior to execution of the assignment, and failed to raise a triable issue of fact about whether Citibank was the holder of the note at the time it commenced the foreclosure action. As a result, the court dismissed the complaint for lack of standing and cancelled the notice of pendency filed by Citibank.

'

No Requirement for Mortgagee to File Affirmation for an Order of Reference

U.S. Bank, N.A. v. Ramjit

NYLJ 2/6/15, p. 27, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In mortgagee bank's foreclosure action, mortgagee appealed from Supreme Court's sua sponte dismissal of the complaint. The Appellate Division reversed, holding that the Administrative Order issued by the Chief Judge, requiring an attorney's affirmation, did not require the require filing of the affirmation to applications for an order of reference made before the Administrative Order was issued.

Mortgagee bank brought this foreclosure action in 2008, alleging that mortgagor had defaulted by failing to make payments. Mortgagor did not appear and, on July 9, 2009, mortgagee bank moved for an order of reference. Two years later, in July 2011, Supreme Court ordered mortgagee bank to file an attorney's affirmation in accordance with the Chief Judge's Administrative Order, which had been issued on Oct. 20, 2010 (and which, in 2011, was replaced by another order). Supreme Court indicated that the complaint would be dismissed if mortgagee bank did not file the affirmation within 60 days. Mortgagee bank renewed its motion for an order of reference in September 2011, without filing the attorney's affirmation. Supreme Court then dismissed the foreclosure action with prejudice, and cancelled mortgagee bank's notice of pendency. Mortgagee appealed.

In reversing, the Appellate Division acknowledged that the Administrative Order requires counsel for the mortgagee in a residential foreclosure proceeding to file an affirmation confirming the accuracy of the pleadings. But the Administrative Order also provides, with respect to pending applications, that the affirmation must be filed at the time of filing “either the proposed order of reference or the proposed judgment of foreclosure.” The court held that in this case, where the proposed order of reference was filed before issuance of the Administrative Order, the mortgagee bank was not required to file the affirmation to accompany the proposed order of reference. Instead, the bank was not required to file the affirmation until it files a proposed judgment of foreclosure. As a result, Supreme Court erroneously dismissed the complaint and cancelled the notice of pendency. The Appellate Division remanded to Supreme Court for further proceedings before a different justice.

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