Real Property Law

Contingent Remaindermen Have Standing to Bring Waste Action

Kilmer v. Moseman

NYLJ 2/17/15

AppDiv., Third Dept.

(Opinion by Garry, J.)

In a waste action, holders of a present possessory interest appealed from Supreme Court's denial of their motion to dismiss. The Appellate Division affirmed, holding that contingent remaindermen had standing to maintain the waste action.

Arthur Kilmer's will devised a joint life estate in property on East River Road to two of his sons, Roger and Kenneth. At the death of the survivor of Roger and Kenneth, each son's share was to pass to his “distributees ' living at the time of the termination of the life estates.” Kenneth died childless and single, so issue of his parents would be his distributees. Roger is still alive. Another brother, William, and William's children, brought this action for waste against a corporation formed to manage the property. The complaint alleged that the corporation engaged in improper removal of stone and timber. William died after the action was brought, and the corporation moved to dismiss, contending that William's interest in the property was extinguished by his death. Supreme Court denied the motion.

In affirming, the Appellate Division emphasized that William's children remained contingent remaindermen in the East River property, because they would be entitled to share in the property if they survive Roger. As a result, they had standing to assert waste claims against the life tenant and his agents, including the corporation engaged to manage the property. They were also entitled to seek an accounting against the corporation.

COMMENT

RPAPL Section 831 grants any person “seized of an estate in remainder or reversion” standing to bring waste claims. But whether contingent interest holders may bring waste claims is still in doubt. In interpreting an earlier statute with identical language, the Third Department previously suggested, in Dix v. Jaquay, 94 A.D. 554. that contingent interest holders had no standing to bring waste claims. In Dix, the court held that life tenant could recover waste damages from subtenant for subtenant's harm to both the life interest and the future interest. Subtenant removed trees from the property, which harmed only the future interest. In interpreting the then-effective Section 1665 of the Civil Procedure Code, the court stated, in dicta, t hat a “contingent remainderman can hardly be said to be seised of an estate in remainder.” Also, the First Department previously declined to rule on whether the contingent interest holder had standing to sue the possessory interest holder defendant for an accounting because plaintiff failed to state a cause of action for waste. In Furniss v. Furniss, 148 A.D. 211, the will granted defendant real estate trust's beneficiary (i.e., possessory interest holder) the right to appoint remainders. Thus, plaintiff's contingent interest would vest only if the trust's beneficiary, before dying, failed to exercise the right to appoint a remainder. The court held that plaintiff failed to make out a claim for waste because, under the will, defendant had both: 1) no express duty to account for its real holdings to plaintiff; and 2) the express right to sell its real estate holdings. The court explicitly declined to decide whether plaintiff's contingent interest would have entitled plaintiff to an accounting if plaintiff had properly alleged waste.

Future interest holders generally have no standing to recover waste damages from third parties that damage the property. Only the possessory interest holder may sue the third party for waste damages. The possessory interest holder is then a trustee for the future interest holder's share of the waste damages. In Rogers v. Atlantic, G. & P. Co., 213 N.Y. 246, the Court of Appeals affirmed plaintiff life tenant's recovery of damages to both the life estate and the future interest. A third party's fire damaged the property. The court held that only life tenant (and not future interest holder) had standing to sue the third party. The court suggested protecting future interest holder by either: 1) apportioning damages between life tenant and future interest holder; or 2) requiring life tenant to provide security for future interest holder's share of the waste damages. Although the future interest holders in Kilmer also sued a third-party defendant for waste, the case fell outside the rule in Rogers because the third-party defendant was merely the possessory interest holder's agent or alter ego; possessory interest holder formed the third-party corporate defendant to manage the property.

Location of Boundary Line Upheld Despite Discrepancy In Acreage

Shattuck v. Laing

NYLJ 2/18/15

AppDiv, Third Dept.

(Garry, J.)

In a dispute between neighboring landowners over a boundary line, defendant landowner appealed from Supreme Court's order locating the boundary line at the center of an abandoned roadway. The Appellate Division affirmed, rejecting defendant landowner's argument that Supreme Court's location gave plaintiff more acreage than the relevant deeds contemplated.

Defendant landowner's predecessors conveyed land to plaintiff landowner's predecessors in 1885. Two separate handwritten deeds were executed, four months apart, one by eight of the nine grantors, the second by the ninth grantor. Each of the two handwritten deeds provided that the property conveyed was to be bounded on the west line by a public highway, and described the property as 14 acres, more or less. A typed version of the first deed described the property as “14 acres being the covenant of land hereby conveyed more or less the west line aforesaid being a public highway,” deleting a comma ' after “more or less” ' that appeared in the first of the two handwritten deeds. If the western boundary extended to the now-abandoned public highway, the property plaintiff landowner's predecessors acquired would have been 35 acres, not 14. As a result, defendant landowner argued that the property should not extend to the abandoned roadway. Supreme Court disagreed, holding that “more or less” qualified the 14 acres, not the description of the public highway as the west line boundary.

In affirming, the Appellate Division first held that the handwritten deeds provided better evidence of the grantors' intent than the typewritten version. As a result, the court agreed with Supreme Court that the placement of the comma supported the conclusion that “more or less” qualified the 14 acres. The court then relied on a rule of construction that references to natural or artificial objects take precedence over references to quantity of land conveyed. Finally, the court concluded that plaintiff landowner's surveyor had come up with a more plausible location of the now-abandoned public highway than the defendant landowner's surveyor.

COMMENT

In the context of a boundary dispute, a deed's references to natural landmarks and artificial monuments are generally more persuasive as evidence than distance descriptions and measurements, especially when the starting and ending points of those measurements are unclear. In Henshaw v. Younes, 101 A.D.3d 1557 (3rd Dept. 2012), in an action to quiet title to a parcel of land located between properties owned by the parties, the Appellate Division concluded that defendants, whose claim was based on natural landmarks, were title owners of the disputed property. The dispute turned on the location of a private road (overgrown at the time of the dispute) that determined the boundary between the two properties Defendant's evidence of the location of the road was based on previous surveys that defined the road as being marked by a berm, ditch, and apron. The court concluded that this evidence was more persuasive than that presented by plaintiff, who estimated the location of the private road off of measurements from an overgrown driveway he believed to be the private road referenced in the deed. In Thomas v. Brown, 145 A.D.2d 849 (3rd Dept. 1988), the court described the hierarchy of evidence when resolving a deed dispute as such: natural objects are most persuasive, followed by artificial objects, then adjacent boundaries, then courses and distances, and finally quantity.

However, this alleged hierarchy is not completely inflexible, and courts will subordinate the rule when it conflicts with the primary goal of resolving a boundary dispute; that is, determining the true intent of the parties. In Earl v. Smithler, 195 A.D.2d 969 (4th Dept. 1993), the Appellate Division reversed the judgment of the Supreme Court, finding that the trial court had improperly applied the “general rule” of determining boundaries by relying on an un-fixed monument as opposed to distances clearly defined in the deed. The disputed boundary in Earl was described in the deed as the center of a ditch located approximately 165 feet north of a nearby road. The Supreme Court, relying on the location of a ditch that defendants later admitted to having dug themselves, originally found the boundary to be only 94 feet from the road. In reversing, the court found that the ditch was “not a reliable means of establishing the boundary” because it was not a permanent or fixed object, and held the 165 foot distance from the road to be the true boundary, since it was clear in all the relevant deeds that the grantor intended to convey to plaintiff a parcel with a 165-foot boundary.

Bank Had Standing to Foreclose

PNC Bank, National Association v. Klein

NYLJ 2/27/15, p. 26, col. 1

AppDiv., Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, mortgagor appealed from Supreme Court's grant of mortgagee bank's summary judgment motion. The Appellate Division affirmed, holding that the bank had standing to bring the foreclosure action.

Mortgagor initially executed a note and mortgage in favor of National City Mortgage Co. PNC Bank succeeded to the interest of National City through a series of mergers. Mortgagor defaulted on the mortgage, and when PNC brought this foreclosure action, mortgagor contended that PNC lacked standing. Supreme Court awarded summary judgment to PNC, and mortgagor appealed.

In affirming, the Appellate Division had made a prima facie showing of its standing by its submissions, in admissible form, establishing the series of mergers through which the mortgage and note devolved to PNC. The court rejected mortgagor's argument that PNC was required to prove the mergers solely by public documentation. The court then held that the mergers obviated any need for assignments of the note and mortgage because PNC and its predecessor had continuous possession of the original. Finally, the court noted that mortgagor had not raised any triable issues of fact to rebut PNC's prima facie showing of standing.

COMMENT

A successor mortgagee lacks standing to bring a foreclosure action unless the mortgagee establishes that, at the time the action was commenced, the mortgagee owned both the mortgage and note. In Citimortgage, Inc. v. Stosel, 89 A.D.3d 887, 888, 934 N.Y.S.2d 182, 183, the Appellate Division dismissed mortgagee's foreclosure proceeding for lack of standing because the mortgagee was unable to prove physical delivery or written assignment of the note. Similarly, in Wells Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204, 887 N.Y.S.2d 615, the court held that the mortgagee lacked standing to bring a foreclosure action when mortgagee was unable to prove ownership of the mortgage at the time the summons and complaint were filed. The court rejected mortgagee's argument that it had standing because the assignment had been executed before it had served the summons and complaint on mortgagor, holding that the time of filing ' not the time of service ' was critical.

To establish standing to foreclose, a successor mortgagee who relies on assignment of the note and mortgage must present both documents with the appropriate endorsements dated prior to the commencement of the foreclosure action. In Deutsche Bank Nat. Trust Co. v. McRae, 27 Misc. 3d 247, 251, 894 N.Y.S.2d 720, 723, a supposed successor mortgagee was barred from bringing a foreclosure proceeding since the endorsements on the note were not dated. In comparing the original note submitted to the court with a second copy that was produced for the present action, the court observed that the note attached to the original complaint did not have dated endorsements, whereas a second copy, produced in response to a challenge to mortgagee's standing, did have dated endorsements. The court held that the endorsements on the second copy were post-dated, and therefore invalid. Similarly, in Lasalle Bank Nat. Ass'n v. Ahearn, 59 A.D.3d 911, 912, 875 N.Y.S.2d 595, 597 the court dismissed a foreclosure proceeding for lack of standing when the successor mortgagee did not file a written assignment until two months after the commencement of the proceeding, and could not prove physical delivery of the documents prior to the commencement of the action.

In foreclosure actions where the foreclosing mortgagee has not acquired the mortgage through assignment, but rather through corporate merger, it is unnecessary for the foreclosing mortgagee to prove assignment of the mortgage and note to establish standing. The court in Barclay's Bank of New York, N.A. v. Smitty's Ranch, Inc., 122 A.D.2d 323, 504 N.Y.S.2d 295 held that the plaintiff mortgagee, a bank that succeeded to a mortgage through a series of bank mergers, was not required to prove assignment of the mortgage and note to establish standing to foreclose a mortgage. The loan agreement did not name the merged entity as the mortgagee, leading to an argument by the mortgagor that the merged entity did not have standing. In rejecting mortgagor's argument, the court relied on Banking Law ' 602, which provides that the receiving corporation in a merger is vested with all rights and powers of the merged corporation, thus making proof of assignment unnecessary.

Fraudulent Concealment Claim

TIAA Global Investments, LLC v. One Astoria Square LLC

NYLJ 3/5/15, p. 18, col. 1

AppDiv., First Dept.

(4-1 decision; Opinion by Mazzarelli, J.; dissenting opinion by DeGrasse, J.)

In an action by purchaser for fraudulent concealment, fraudulent misrepresentation, fraud, and breach of contract, seller appealed from Supreme Court's denial of its motion to dismiss. The Appellate Division modified to dismiss the breach of contract claims as time-barred, and otherwise affirmed, holding that “as-is” provisions in the sale contract, together with provisions in which purchaser disavowed reliance on any representations by seller, did not preclude the claims advanced by purchaser.

Purchaser contracted to purchaser a 14 story, 115-unit apartment building, for $43 million. The sale contract provided that seller made no express or implied representations with respect to the property, that purchaser was not relying on any representations made by seller and was instead relying on its own inspections and investigations, and that purchaser was taking the property “as is.” The contract also recited that the purchaser price had been adjusted to reflect purchaser's acceptance of these “as-is” provisions, and also provided that those provisions would survive closing. At the same time, however, seller represented that there were no actions or proceedings, threatened or pending, which would have a material adverse impact on the property, and that seller had received no written notice of any claims by any tenant with respect to its lease.

After closing, purchasers allegedly learned of significant problems with the air infiltration system in the building. In particular, they allegedly learned of inadequate insulation, fire walls, and connection of vertical interior walls to slabs. Purchaser then brought this action, alleging fraudulent concealment, fraudulent misrepresentation, fraud, and breach of contract by the seller. Seller moved to dismiss, and Supreme Court denied the motion.

In modifying, the Appellate Division held purchaser's breach of contract claims, based on seller's representation that there were no threatened actions, were barred by the nine-month limitation period included in the sale contract. As a result, the court dismissed those claims. The court, however, held that the “as-is” clause and the “no-reliance” clause in the sale contract did not bar the claims of fraud and fraudulent misrepresentation because the alleged misrepresentations by the seller were matters peculiarly within the seller's knowledge. In this case, the purchasers might have had to engage in destructive investigation to ascertain the nature of insulation defects in the building, so the court concluded that purchasers had stated a claim that it would not have been practical for them to discover those defects. The court also held that Supreme Court had properly pierced the seller's corporate veil because the individual owners of the corporate defendant dominated the corporation and used that domination to commit a fraud.

Justice DeGrasse, dissenting, emphasized that the contract gave the purchaser broad inspection rights, even if the inspections were to cause damage, so long as purchaser repaired the damage caused by the inspections. As a result, he concluded that the “as-is” and “no-reliance” clauses should have barred the fraud claims.

COMMENT

A seller's failure to disclose material information peculiarly within its knowledge confers on the buyer the right to raise a claim or defense sounding in fraud. This is true even if the contract contains a specific disclaimer of reliance on anything not contained within the contract or an “as-is” clause. An undisclosed defect is deemed to be peculiarly within the seller's knowledge if the buyer cannot accurately assess the defect. In Schooley v. Mannion, 241 A.D.2d 677, the court allowed a claim for fraud in inducement in a real estate sales contract, despite an “as-is” clause, because the seller, who was aware of defects in the insulation, failed to disclose the defect to the buyer, who could only have discovered the defect by invasive, damaging inspection, which was not allowed by the seller prior to closing. Similarly, in Constantino v. Lynch, 1 63 Misc. 2d 924, the court held that a fraudulent misrepresentation claim survived a motion to dismiss, where seller of an apartment building orally represented to the buyer that all units were registered and that the rents charged were legal. Although the sale contract contained a specific disclaimer as to reliance on oral representations, the court emphasized that the truth of the statements may have been undiscoverable by the buyer.

Where a buyer's exercise of ordinary intelligence and due diligence through inspection would have resulted in the discovery of an undisclosed defect and the seller has not thwarted efforts of the buyer to discover defects, the seller cannot be held liable for fraudulent misrepresentation. In Superior Realty Corp v. Cardiff Realty, Inc., 126 A.D.2d 633, the court barred fraudulent misrepresentation claims arising out of a real estate sales contract's false statement that the building had only minor plumbing problems because the buyer could have discovered the defects through physical inspection. Similarly, in Dyke v. Peck, 279 A.D.2d 841, the court awarded summary judgment to seller on buyer's claim that seller, responding to buyer's question, gave false information as to the material of a floor covered by carpet. The court emphasized that the buyer was in no way hindered from inspecting the floor and therefore could have discovered the misrepresentation “by making additional relevant inquiries and exercising ordinary intelligence.”

A buyer cannot, in any event, recover for fraudulent misrepresentation unless the seller had knowledge of the undiscoverable defect. In Friedler v. Palyompis, 44 A.D.3d 611, the court dismissed the buyer's fraudulent misrepresentation claim against the brokers for the seller, alleging undisclosed structural defects, because the brokers neither knew about the defect nor had any reason to suspect that the inspections carried out were in any way faulty so as to miss the defects.

'

Contingent Remaindermen Have Standing to Bring Waste Action

Kilmer v. Moseman

NYLJ 2/17/15

AppDiv., Third Dept.

(Opinion by Garry, J.)

In a waste action, holders of a present possessory interest appealed from Supreme Court's denial of their motion to dismiss. The Appellate Division affirmed, holding that contingent remaindermen had standing to maintain the waste action.

Arthur Kilmer's will devised a joint life estate in property on East River Road to two of his sons, Roger and Kenneth. At the death of the survivor of Roger and Kenneth, each son's share was to pass to his “distributees ' living at the time of the termination of the life estates.” Kenneth died childless and single, so issue of his parents would be his distributees. Roger is still alive. Another brother, William, and William's children, brought this action for waste against a corporation formed to manage the property. The complaint alleged that the corporation engaged in improper removal of stone and timber. William died after the action was brought, and the corporation moved to dismiss, contending that William's interest in the property was extinguished by his death. Supreme Court denied the motion.

In affirming, the Appellate Division emphasized that William's children remained contingent remaindermen in the East River property, because they would be entitled to share in the property if they survive Roger. As a result, they had standing to assert waste claims against the life tenant and his agents, including the corporation engaged to manage the property. They were also entitled to seek an accounting against the corporation.

COMMENT

RPAPL Section 831 grants any person “seized of an estate in remainder or reversion” standing to bring waste claims. But whether contingent interest holders may bring waste claims is still in doubt. In interpreting an earlier statute with identical language, the Third Department previously suggested, in Dix v. Jaquay, 94 A.D. 554. that contingent interest holders had no standing to bring waste claims. In Dix, the court held that life tenant could recover waste damages from subtenant for subtenant's harm to both the life interest and the future interest. Subtenant removed trees from the property, which harmed only the future interest. In interpreting the then-effective Section 1665 of the Civil Procedure Code, the court stated, in dicta, t hat a “contingent remainderman can hardly be said to be seised of an estate in remainder.” Also, the First Department previously declined to rule on whether the contingent interest holder had standing to sue the possessory interest holder defendant for an accounting because plaintiff failed to state a cause of action for waste. In Furniss v. Furniss, 148 A.D. 211, the will granted defendant real estate trust's beneficiary ( i.e., possessory interest holder) the right to appoint remainders. Thus, plaintiff's contingent interest would vest only if the trust's beneficiary, before dying, failed to exercise the right to appoint a remainder. The court held that plaintiff failed to make out a claim for waste because, under the will, defendant had both: 1) no express duty to account for its real holdings to plaintiff; and 2) the express right to sell its real estate holdings. The court explicitly declined to decide whether plaintiff's contingent interest would have entitled plaintiff to an accounting if plaintiff had properly alleged waste.

Future interest holders generally have no standing to recover waste damages from third parties that damage the property. Only the possessory interest holder may sue the third party for waste damages. The possessory interest holder is then a trustee for the future interest holder's share of the waste damages. In Rogers v. Atlantic, G. & P. Co., 213 N.Y. 246, the Court of Appeals affirmed plaintiff life tenant's recovery of damages to both the life estate and the future interest. A third party's fire damaged the property. The court held that only life tenant (and not future interest holder) had standing to sue the third party. The court suggested protecting future interest holder by either: 1) apportioning damages between life tenant and future interest holder; or 2) requiring life tenant to provide security for future interest holder's share of the waste damages. Although the future interest holders in Kilmer also sued a third-party defendant for waste, the case fell outside the rule in Rogers because the third-party defendant was merely the possessory interest holder's agent or alter ego; possessory interest holder formed the third-party corporate defendant to manage the property.

Location of Boundary Line Upheld Despite Discrepancy In Acreage

Shattuck v. Laing

NYLJ 2/18/15

AppDiv, Third Dept.

(Garry, J.)

In a dispute between neighboring landowners over a boundary line, defendant landowner appealed from Supreme Court's order locating the boundary line at the center of an abandoned roadway. The Appellate Division affirmed, rejecting defendant landowner's argument that Supreme Court's location gave plaintiff more acreage than the relevant deeds contemplated.

Defendant landowner's predecessors conveyed land to plaintiff landowner's predecessors in 1885. Two separate handwritten deeds were executed, four months apart, one by eight of the nine grantors, the second by the ninth grantor. Each of the two handwritten deeds provided that the property conveyed was to be bounded on the west line by a public highway, and described the property as 14 acres, more or less. A typed version of the first deed described the property as “14 acres being the covenant of land hereby conveyed more or less the west line aforesaid being a public highway,” deleting a comma ' after “more or less” ' that appeared in the first of the two handwritten deeds. If the western boundary extended to the now-abandoned public highway, the property plaintiff landowner's predecessors acquired would have been 35 acres, not 14. As a result, defendant landowner argued that the property should not extend to the abandoned roadway. Supreme Court disagreed, holding that “more or less” qualified the 14 acres, not the description of the public highway as the west line boundary.

In affirming, the Appellate Division first held that the handwritten deeds provided better evidence of the grantors' intent than the typewritten version. As a result, the court agreed with Supreme Court that the placement of the comma supported the conclusion that “more or less” qualified the 14 acres. The court then relied on a rule of construction that references to natural or artificial objects take precedence over references to quantity of land conveyed. Finally, the court concluded that plaintiff landowner's surveyor had come up with a more plausible location of the now-abandoned public highway than the defendant landowner's surveyor.

COMMENT

In the context of a boundary dispute, a deed's references to natural landmarks and artificial monuments are generally more persuasive as evidence than distance descriptions and measurements, especially when the starting and ending points of those measurements are unclear. In Henshaw v. Younes, 101 A.D.3d 1557 (3rd Dept. 2012), in an action to quiet title to a parcel of land located between properties owned by the parties, the Appellate Division concluded that defendants, whose claim was based on natural landmarks, were title owners of the disputed property. The dispute turned on the location of a private road (overgrown at the time of the dispute) that determined the boundary between the two properties Defendant's evidence of the location of the road was based on previous surveys that defined the road as being marked by a berm, ditch, and apron. The court concluded that this evidence was more persuasive than that presented by plaintiff, who estimated the location of the private road off of measurements from an overgrown driveway he believed to be the private road referenced in the deed. In Thomas v. Brown, 145 A.D.2d 849 (3rd Dept. 1988), the court described the hierarchy of evidence when resolving a deed dispute as such: natural objects are most persuasive, followed by artificial objects, then adjacent boundaries, then courses and distances, and finally quantity.

However, this alleged hierarchy is not completely inflexible, and courts will subordinate the rule when it conflicts with the primary goal of resolving a boundary dispute; that is, determining the true intent of the parties. In Earl v. Smithler, 195 A.D.2d 969 (4th Dept. 1993), the Appellate Division reversed the judgment of the Supreme Court, finding that the trial court had improperly applied the “general rule” of determining boundaries by relying on an un-fixed monument as opposed to distances clearly defined in the deed. The disputed boundary in Earl was described in the deed as the center of a ditch located approximately 165 feet north of a nearby road. The Supreme Court, relying on the location of a ditch that defendants later admitted to having dug themselves, originally found the boundary to be only 94 feet from the road. In reversing, the court found that the ditch was “not a reliable means of establishing the boundary” because it was not a permanent or fixed object, and held the 165 foot distance from the road to be the true boundary, since it was clear in all the relevant deeds that the grantor intended to convey to plaintiff a parcel with a 165-foot boundary.

Bank Had Standing to Foreclose

PNC Bank, National Association v. Klein

NYLJ 2/27/15, p. 26, col. 1

AppDiv., Second Dept.

(memorandum opinion)

In a mortgage foreclosure action, mortgagor appealed from Supreme Court's grant of mortgagee bank's summary judgment motion. The Appellate Division affirmed, holding that the bank had standing to bring the foreclosure action.

Mortgagor initially executed a note and mortgage in favor of National City Mortgage Co. PNC Bank succeeded to the interest of National City through a series of mergers. Mortgagor defaulted on the mortgage, and when PNC brought this foreclosure action, mortgagor contended that PNC lacked standing. Supreme Court awarded summary judgment to PNC, and mortgagor appealed.

In affirming, the Appellate Division had made a prima facie showing of its standing by its submissions, in admissible form, establishing the series of mergers through which the mortgage and note devolved to PNC. The court rejected mortgagor's argument that PNC was required to prove the mergers solely by public documentation. The court then held that the mergers obviated any need for assignments of the note and mortgage because PNC and its predecessor had continuous possession of the original. Finally, the court noted that mortgagor had not raised any triable issues of fact to rebut PNC's prima facie showing of standing.

COMMENT

A successor mortgagee lacks standing to bring a foreclosure action unless the mortgagee establishes that, at the time the action was commenced, the mortgagee owned both the mortgage and note. In Citimortgage, Inc. v. Stosel , 89 A.D.3d 887, 888, 934 N.Y.S.2d 182, 183, the Appellate Division dismissed mortgagee's foreclosure proceeding for lack of standing because the mortgagee was unable to prove physical delivery or written assignment of the note. Similarly, in Wells Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204, 887 N.Y.S.2d 615, the court held that the mortgagee lacked standing to bring a foreclosure action when mortgagee was unable to prove ownership of the mortgage at the time the summons and complaint were filed. The court rejected mortgagee's argument that it had standing because the assignment had been executed before it had served the summons and complaint on mortgagor, holding that the time of filing ' not the time of service ' was critical.

To establish standing to foreclose, a successor mortgagee who relies on assignment of the note and mortgage must present both documents with the appropriate endorsements dated prior to the commencement of the foreclosure action. In Deutsche Bank Nat. Trust Co. v. McRae, 27 Misc. 3d 247, 251, 894 N.Y.S.2d 720, 723, a supposed successor mortgagee was barred from bringing a foreclosure proceeding since the endorsements on the note were not dated. In comparing the original note submitted to the court with a second copy that was produced for the present action, the court observed that the note attached to the original complaint did not have dated endorsements, whereas a second copy, produced in response to a challenge to mortgagee's standing, did have dated endorsements. The court held that the endorsements on the second copy were post-dated, and therefore invalid. Similarly, in Lasalle Bank Nat. Ass'n v. Ahearn, 59 A.D.3d 911, 912, 875 N.Y.S.2d 595, 597 the court dismissed a foreclosure proceeding for lack of standing when the successor mortgagee did not file a written assignment until two months after the commencement of the proceeding, and could not prove physical delivery of the documents prior to the commencement of the action.

In foreclosure actions where the foreclosing mortgagee has not acquired the mortgage through assignment, but rather through corporate merger, it is unnecessary for the foreclosing mortgagee to prove assignment of the mortgage and note to establish standing. The court in Barclay's Bank of New York, N.A. v. Smitty's Ranch, Inc., 122 A.D.2d 323, 504 N.Y.S.2d 295 held that the plaintiff mortgagee, a bank that succeeded to a mortgage through a series of bank mergers, was not required to prove assignment of the mortgage and note to establish standing to foreclose a mortgage. The loan agreement did not name the merged entity as the mortgagee, leading to an argument by the mortgagor that the merged entity did not have standing. In rejecting mortgagor's argument, the court relied on Banking Law ' 602, which provides that the receiving corporation in a merger is vested with all rights and powers of the merged corporation, thus making proof of assignment unnecessary.

Fraudulent Concealment Claim

TIAA Global Investments, LLC v. One Astoria Square LLC

NYLJ 3/5/15, p. 18, col. 1

AppDiv., First Dept.

(4-1 decision; Opinion by Mazzarelli, J.; dissenting opinion by DeGrasse, J.)

In an action by purchaser for fraudulent concealment, fraudulent misrepresentation, fraud, and breach of contract, seller appealed from Supreme Court's denial of its motion to dismiss. The Appellate Division modified to dismiss the breach of contract claims as time-barred, and otherwise affirmed, holding that “as-is” provisions in the sale contract, together with provisions in which purchaser disavowed reliance on any representations by seller, did not preclude the claims advanced by purchaser.

Purchaser contracted to purchaser a 14 story, 115-unit apartment building, for $43 million. The sale contract provided that seller made no express or implied representations with respect to the property, that purchaser was not relying on any representations made by seller and was instead relying on its own inspections and investigations, and that purchaser was taking the property “as is.” The contract also recited that the purchaser price had been adjusted to reflect purchaser's acceptance of these “as-is” provisions, and also provided that those provisions would survive closing. At the same time, however, seller represented that there were no actions or proceedings, threatened or pending, which would have a material adverse impact on the property, and that seller had received no written notice of any claims by any tenant with respect to its lease.

After closing, purchasers allegedly learned of significant problems with the air infiltration system in the building. In particular, they allegedly learned of inadequate insulation, fire walls, and connection of vertical interior walls to slabs. Purchaser then brought this action, alleging fraudulent concealment, fraudulent misrepresentation, fraud, and breach of contract by the seller. Seller moved to dismiss, and Supreme Court denied the motion.

In modifying, the Appellate Division held purchaser's breach of contract claims, based on seller's representation that there were no threatened actions, were barred by the nine-month limitation period included in the sale contract. As a result, the court dismissed those claims. The court, however, held that the “as-is” clause and the “no-reliance” clause in the sale contract did not bar the claims of fraud and fraudulent misrepresentation because the alleged misrepresentations by the seller were matters peculiarly within the seller's knowledge. In this case, the purchasers might have had to engage in destructive investigation to ascertain the nature of insulation defects in the building, so the court concluded that purchasers had stated a claim that it would not have been practical for them to discover those defects. The court also held that Supreme Court had properly pierced the seller's corporate veil because the individual owners of the corporate defendant dominated the corporation and used that domination to commit a fraud.

Justice DeGrasse, dissenting, emphasized that the contract gave the purchaser broad inspection rights, even if the inspections were to cause damage, so long as purchaser repaired the damage caused by the inspections. As a result, he concluded that the “as-is” and “no-reliance” clauses should have barred the fraud claims.

COMMENT

A seller's failure to disclose material information peculiarly within its knowledge confers on the buyer the right to raise a claim or defense sounding in fraud. This is true even if the contract contains a specific disclaimer of reliance on anything not contained within the contract or an “as-is” clause. An undisclosed defect is deemed to be peculiarly within the seller's knowledge if the buyer cannot accurately assess the defect. In Schooley v. Mannion, 241 A.D.2d 677, the court allowed a claim for fraud in inducement in a real estate sales contract, despite an “as-is” clause, because the seller, who was aware of defects in the insulation, failed to disclose the defect to the buyer, who could only have discovered the defect by invasive, damaging inspection, which was not allowed by the seller prior to closing. Similarly, in Constantino v. Lynch, 1 63 Misc. 2d 924, the court held that a fraudulent misrepresentation claim survived a motion to dismiss, where seller of an apartment building orally represented to the buyer that all units were registered and that the rents charged were legal. Although the sale contract contained a specific disclaimer as to reliance on oral representations, the court emphasized that the truth of the statements may have been undiscoverable by the buyer.

Where a buyer's exercise of ordinary intelligence and due diligence through inspection would have resulted in the discovery of an undisclosed defect and the seller has not thwarted efforts of the buyer to discover defects, the seller cannot be held liable for fraudulent misrepresentation. In Superior Realty Corp v. Cardiff Realty, Inc., 126 A.D.2d 633, the court barred fraudulent misrepresentation claims arising out of a real estate sales contract's false statement that the building had only minor plumbing problems because the buyer could have discovered the defects through physical inspection. Similarly, in Dyke v. Peck, 279 A.D.2d 841, the court awarded summary judgment to seller on buyer's claim that seller, responding to buyer's question, gave false information as to the material of a floor covered by carpet. The court emphasized that the buyer was in no way hindered from inspecting the floor and therefore could have discovered the misrepresentation “by making additional relevant inquiries and exercising ordinary intelligence.”

A buyer cannot, in any event, recover for fraudulent misrepresentation unless the seller had knowledge of the undiscoverable defect. In Friedler v. Palyompis, 44 A.D.3d 611, the court dismissed the buyer's fraudulent misrepresentation claim against the brokers for the seller, alleging undisclosed structural defects, because the brokers neither knew about the defect nor had any reason to suspect that the inspections carried out were in any way faulty so as to miss the defects.

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