Real Property Law

AppDiv, First Dept.

(memorandum opinion)

In a dispute among co-tenants, plaintiff Mark appealed from Supreme Court's grant of summary judgment to defendant Sanko on the latter's counterclaim for partition. The Appellate Division affirmed, holding that the right of first refusal in an agreement among the co-tenants did not preclude partition.

Mark, Sanko, and a third party are tenants-in-common in a Manhattan building. An agreement among them granted each co-tenant a 30-day right of first refusal if another co-tenant sought to sell his interest. Sanko obtained an offer to purchase his one-third interest, subject to some conditions. Sanko notified the other two co-tenants, but neither offered to purchase. When Mark sought to block the sale, Sanko counterclaimed for partition. Supreme Court awarded Sanko summary judgment on the partition counterclaim. Mark appealed.

In affirming, the Appellate Division held that a right of first refusal is incompatible with partition only for the period during which cotenants may exercise the right. Once the period expires, as it has in this case, the court held that the right to partition is absolute. The cotenant seeking partition does not have to establish fundamental disagreement among the cotenants as a prerequisite to a partition action. The court then rejected Mark's argument that the proposed sale did not trigger the right of first refusal because the term sheet for the third-party offer was too indefinite to constitute a bona fide offer. The court emphasized that an offer may be treated as bona fide even though it is subject to conditions, and even though the offeror never enters into a contract to purchase the seller's interest.

COMMENT

RPAPL ' 901 permits a party holding real property as a tenant in common or as a joint tenant to seek a partition, but case law interpreting the statute enforces contractual agreements that preclude partition for a reasonable period of time. In McNally v. McNally, 1 29 A.D.3d 686, the Second Department held that a separation agreement granting one cotenant exclusive occupation of the premises for her lifetime barred the other cotenant from obtaining a partition. In McNally, a fter a couple's divorce converted their tenancy by the entirety into a tenancy in common, the now-deceased husband's estate sought partition. In enforcing the agreement and dismissing the action, the court held that the lifetime time frame constituted a reasonable temporal limitation, and that a partition during the wife's lifetime violated the parties' agreement.

A right-of-first refusal provision precludes a cotenant's ability to seek a partition sale until the other cotenants have been given the chance to exercise the right to purchase. In T ramontano v. Catalano, 23 A.D.2d 894, the Second Department denied a motion for summary judgment made by a party seeking partition holding that a right of first refusal constituted a valid defense to a partition action during the period in which the right is exercisable. In Tramontano, the parties acquired a home as tenants in common pursuant to a purchase agreement providing that neither owner would sell an interest in the home without first giving the other owner 60 days to offer to purchase that interest. The court held that this provision prevented a cotenant from seeking a partition sale without first giving the other cotenant 60 days to elect to purchase. The court indicated that once the 60-day period had elapsed, if the non-partitioning cotenant has not decided to exercise the right, the cotenant would be free to seek a partition.

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Agent's Misconduct

Podesta v. Assumable Homes Development Corp.

NYLJ 3/4/16, p. 33, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In mortgagee's action against a title insurer for fraud, title insurer appealed from Supreme Court's denial of its motion to dismiss. The Appellate Division modified to dismiss mortgagee's punitive damages claims, but otherwise affirmed, holding that the title insurer could be held liable for the misconduct of its agent.

Plaintiff mortgagee, originally the owner of 11 acres, sold the property to Assumable in 2003, taking back a purchase money mortgage. Three years later, Assumable sought to subdivide the property. As a condition of the subdivision, the town required Assumable to convey 4.63 acres to the town, free of the mortgage. At Assumable's request, mortgagee executed a partial release of the mortgage with respect to the 4.63 acres, and Assumable transferred that property to the town. At the closing, title insurer Fidelity, acting through its agent, Mid-Island, issued a title insurance policy to the town. After the closing, the property description on mortgagee's release was altered to make it appear that mortgagee had released the mortgage with respect to the entire 11 acres. The altered release was then recorded.

Later, when mortgagee discovered the alteration, mortgagee brought this action against Assumable and Fidelity, alleging that an employee or agent of Fidelity, acting at the suggestion of Assumable, had altered the release. Supreme Court denied Fidelity's motion to dismiss, and Fidelity appealed.

In upholding Supreme Court's denial of the motion to dismiss, the Appellate Division noted that the complaint alleged that Fidelity had assumed a duty of care to mortgagee to record a proper partial release of the mortgage. The court then recited the rule that a principal must answer to an innocent third person for the misconduct of an agent, and emphasized that the agency agreement submitted by Fidelity did not refute the allegation that Mid-Island was acting on behalf of Fidelity in recording the release including an improper property description. The evidence did not, therefore, refute the claims for fraud and negligence against Fidelity. The court did, however, dismiss the punitive damage claims because the complaint alleged neither conduct of an egregious nature directed at mortgagee nor a pattern of egregious conduct directed at the public.

COMMENT

A title insurer is not liable to a third party for negligence in preparing an abstract unless the title company should have foreseen that a third party would rely on the abstract. For instance, the court in Kidd v. Havens, 171 A.D.2d 336, found that the title company, hired by the seller with knowledge that a purchase was pending, was liable to purchaser of property for negligence in failing to report a mortgage when certifying title, even though title company was not in privity of contract with the purchaser and did not know purchaser's identity. See also JP Morgan Chase Bank, N.A., v. Hall, 122 A.D.3d 567 (the title company owed a duty of care to home purchaser, despite no privity, when the title company, hired by the seller, was aware that the abstract and title report it prepared would be used for the specific purpose of facilitating the sale and mortgage of a property). By contrast, in Calamari v. Grace, 98 A.D.2d 74, the court dismissed sellers' cross claim against purchaser's title insurer in an action originally brought by purchaser against sellers for breach of a covenant against grantors' acts. Although the insurer in Calamari might have been negligent, the sellers, who covenanted against their own actions, had no basis for relying on the insurer's title abstract.

In the absence of privity, a title insurer bears liability for fraud, but not for negligence or gross negligence. In Velazquez v. Decaudin, 49 A.D.3d 712, the Second Department held that Supreme Court had improperly dismissed a fraud claim brought by deceased owner's daughter against a title insurer who issued a policy to a purchaser who allegedly conspired to defraud the property's owner. The court emphasized that privity is not required to assert a claim based on fraud or intentional misconduct, and noted that the complaint alleged that the title company's agent aided or participated in a scheme to defraud. A claim that a title company acted with such reckless negligence that it amounts to fraud can withstand a motion to dismiss even if the plaintiff is not in privity with the title insurer. See Goodman v Title Guarantee & Trust Co., 11 A.D.2d 1003 (dismissing an action for negligence absent privity, but granting leave to replead with an allegation that the insurer's negligence occurred through such recklessness as to constitute fraud). Gross negligence did not, however, rise to the level of fraud in Lebhar v. Nat'l City Bank, 25 Misc.3d 58, when, despite suspicious circumstances, the title insurance company did not detect minority owner's forgery in powers of attorney, causing injury to the owner's credit rating resulting from wrongful issuance of an equity line of credit secured by premises. 25 Misc. 3d 58.

As the Velazquez c ase illustrates, a title insurer is generally liable not only for its own actions, but also for actions of its agents under general principles of agency law. In Faith Assembly v. Titledge of New York Abstract, LLC, 106 AD3d 47, the Second Department affirmed the denial of a title company's dismissal, finding that an escrowee was an agent of title company because nothing in the underwriting agreement expressly limited escrowee's authority. 106 A.D.3d 47. The court noted that specific provisions of the agency agreement explicitly referenced escrow arrangements, raising fact issues as to the title insurer's vicarious responsibility for the agent's misappropriation of escrow funds. The First Department cast some doubt on the general rule in DLJ Mortgage Capital, Inc. v. Kontogiannis, 102 AD3d 489, where the court dismissed a fraud claim against a title insurer, noting that the complaint did not allege that the title company was aware that its agents had issued fraudulent documents. In affirming, the Court of Appeals emphasized that any reliance by plaintiffs, third-party purchasers of mortgages, was unjustifiable. 22 N.Y. 3d 960. The Court of Appeals decision, then effectively reduced t he First Department's language to the equivalent of dictum. Moreover, in a subsequent federal case, the Southern District, noted that neither court in DLJ “gave any indication ' that they intended to reverse longstanding New York precedent” that holds a principal liable for acts of an agent with apparent authority to act on the principal's behalf. F.D.I.C. v. United General Title Ins. Co.

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GBL Section 349

'Disa Realty, Inc. v. Rao

NYLJ 3/4/16, p. 32, col. 6

AppDiv, Second Dept.

(memorandum opinion)

In an action to foreclose a mortgage, mortgagee appealed from Supreme Court's denial of its summary judgment motion and denial of its motion to dismiss mortgagor's counterclaim for violation of General Business Law section 349. The Appellate Division modified to dismiss the counterclaim, but otherwise affirmed, holding that questions of fact precluded the grant of summary judgment on the foreclosure claim.

Mortgagee brought this action to foreclose a mortgage on commercial property, alleging that owner had defaulted on payments. Mortgagor contested the allegations of default, and also counterclaimed, alleging that in taking the initial mortgage, mortgagee violated General Business Law section 349, which prohibits deceptive business practices. Supreme Court concluded that questions of fact precluded summary judgment on the foreclosure claim, and failed to dismiss the counterclaim.

In modifying, the Appellate Division upheld Supreme Court's conclusion that questions of fact remained about whether mortgagor had defaulted, but held that the counterclaim should have been dismissed. The court questioned whether conduct with respect to a purchase money mortgage on commercial property could be treated as consumer-oriented and thus within the scope of section 349, but held that in any event the counterclaim could not be sustained because the evidence established that mortgagee had presented mortgagor with clearly written documents describing the terms of the subject loan.

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