Real Property Law

Former owner, a corporation, acquired title to the subject property in 1974. In 1993, the Secretary of State dissolved the corporation for failure to pay franchise taxes. Six years later, the corporation's owner died. The following year, in 2000, a deed was executed to another corporation, followed by a chain of deeds from that second corporation to Classic Brownstones. The latter obtained mortgage loans from mortgagee bank in an amount totaling $900,000. In this action, former owner, now reinstated as a corporation, sought to quiet title, alleging that the 2000 deed was forged. In 2014, former owner added mortgagee bank as a defendant, and mortgagee bank moved to dismiss. Supreme Court granted the motion, relying on dissolution of the corporation. Former owner then moved to renew, relying on letters from the Department of Taxation and Finance consenting to its reinstatement. Supreme Court denied the motion.

The Appellate Division held that former owner was entitled to renew because the consent to reinstatement constituted new facts unavailable at the time of the original motion. The court also held, relying on Faison v. Lewis, 25 NY3d 220, that no statute of limitations applied to the forged deed claim. The court then held that former owner could not maintain the action under Business Corporation Law section 1006(b), which provides that dissolution of a corporation does not affect remedies for claims arising before dissolution, because the claim against mortgagee bank did not exist before the corporation's dissolution.

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Mortgage Reformed for Mutual Mistake

Gunther v. Vilceus
NYLJ 8/25/16, p. 24, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action to reform a mortgage, mortgagor appealed from Supreme Court's judgment reforming the mortgage and awarding $61,581.32 to mortgagee. The Appellate Division affirmed, holding that mortgagee had established mutual mistake.

Mortgagee sold the property to mortgagor for $550,000, and lent mortgagor $350,000 to finance the purchase. Mortgagee took back a purchase money mortgage. The note and mortgage provided that interest would accrue at the rate of 6% per year, and provided for payment of 60 monthly installments of $2,953.50, followed by a balloon payment of $206,065.79. Mortgagor made all of the payments, including the balloon payment, and mortgagee issued a satisfaction of the mortgage. Shortly thereafter, mortgagee's accountant discovered an arithmetic error in the calculation of the balloon payment, which should have been $267,647.02. Mortgagor refused to pay the balance, and mortgagee brought this action to reform the mortgage and recover the balance. Supreme Court awarded judgment to mortgagee, and mortgagor appealed.

In affirming, the Appellate Division held that mortgagee had established the existence of a mutual mistake by clear and convincing evidence. The court noted that the balloon payment was inconsistent with the mortgage amount of $350,000, and concluded that the writing did not express the agreement that the parties had actually made.

COMMENT

When a party to a mortgage claims that the written agreements do not reflect the parties' intentions, courts will reform the terms based on mutual mistake when the party seeking reformation shows by clear and convincing evidence, including parole evidence, that the written agreements do not make sense in light of the surrounding transaction. For instance, in Janowitz Bros. Venture v. 25-30 120th St. Queens Corp., 75 A.D.2d 203, the Second Department deleted a provision in a purchase money mortgage giving buyer-mortgagor a credit for interest on an anticipated second mortgage that was never consummated. The sale contract set forth an intention that the parties would execute a $12,000 mortgage to a third party who claimed an equitable interest in the property. The contract also provided that in paying off the purchase money mortgage, mortgagor would ultimately receive a credit for interest, calculated at the rate of 6%, on $12,000. At closing, however, the parties paid cash to the third party for a written release of his interest, and no mortgage was ever executed. The mortgage instrument, however was never modified to account for the payment, and still provided buyer-mortgagor with a credit for interest on $12,000. On these facts, the court held that buyer-mortgagor was not entitled to the credit, because the contract of sale made it clear that the credit had reference solely to the anticipated $12,000 mortgage. See also American Mortg. Banking v. Canestro, 201 A.D.2d 407 (where mortgage and note had only one-year term in violation of applicable banking regulations, terms were properly reformed in favor of mortgagee on grounds of mutual mistake to provide for balloon payment mortgage of three years as parties could not have intended to be in violation of banking regulations).

However, reformation of the financial terms of a mortgage will be denied on grounds of mutual mistake where the party opposing reformation can advance a plausible account for why such terms were included in the contract. For example, in Goldberg v. Danann Realty Corp., 30 Misc. 2d 894, the court held that mortgagor was not entitled to reformation to omit a provision requiring that the purchase money mortgage be paid in five years in the face of testimony by the mortgagee's representatives that the parties had agreed on the five-year maturity date. In seeking reformation, mortgagor relied on the absence of a maturity date in the original sale contract. The court, however, held that the mortgagor had not established by clear and convincing evidence that inclusion of the maturity date was the product of mutual mistake. Id. at 896. Conversely, the court noted that the closing was adjourned for the parties to adjust their differences, and that during the adjournment the maturity of the purchase money mortgage was discussed. As a result, the five-year maturity date fit within the surrounding transaction. Id.

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Error in Setting Upset Price Does Not Provide Adequate Basis for Setting Aside Foreclosure Sale

Clinton Hill Holding 1, LLC v. Kathy & Tania, Inc.
NYLJ 8/25/16, p. 25, col. 5
AppDiv, Second Dept.
(memorandum opinion)

In an action to foreclose a mortgage, successful bidder at the foreclosure sale appealed from Supreme Court's order setting aside the foreclosure sale and vacating the referee's deed. The Appellate Division reversed, holding that Supreme Court had not established an adequate basis for setting aside the sale.

In 2009, mortgagors obtained a mortgage loan. They defaulted in 2009, and Supreme Court issued a judgment of foreclosure and sale in 2011. At that point, the original mortgagee assigned the note and mortgage to plaintiff in this action, who ultimately became the successful bidder at the foreclosure sale. When the foreclosure sale was held, in September 2013, the court-appointed referee announced an upset price higher than the amount due on the mortgage. Mortgagors did not appear at the foreclosure sale. Plaintiff was the highest bidder, and the referee executed a deed to plaintiff. In July 2014, mortgagors moved to set aside the foreclosure sale based on the referee's decision to set an upset price in excess of the amount due. Supreme Court granted the motion, and successful bidders appealed.

In reversing, the Appellate Division held that unilateral mistake, without more, is not a basis for setting aside a foreclosure sale in the absence of fraud, collusion, or misconduct that casts suspicion on the fairness of the sale. Kings County court rules allow setting an upset price that does not exceed the amount due on the mortgage, together with interest and taxes, but the rules make no provision for consequences in case of noncompliance with the rules. In this case, mortgagors presented no evidence that other bidders were present at the sale, or that any bidders were impeded by the referee's conduct. On those facts, the court concluded that the mistake did not warrant setting aside the foreclosure sale.

*****

Laches Bars Claim for Reformation of Mortgage

Diecidue v. Russo
NYLJ 9/2/16, p. 23, col. 5
AppDiv, Second Dept.
(memorandum opinion)

In an action for reformation of a mortgage, mortgagor appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that laches barred the reformation claim.

Mortgagor and her husband contracted to purchase the subject property from mortgagee in August 2007. The contract provided that the purchase would be financed with a $300,000 20-year purchase money mortgage from mortgagee. At closing, mortgagor and her husband executed a note and mortgage in accordance with the payment terms in the contract of sale. Mortgagor and her husband made the monthly payments until the husband's 2012 death, and mortgagor continued to make payments after the husband's death. Then, in 2013, mortgagor brought this action to reform the mortgage to reflect an initial balance of $230,000 rather than $300,000. She contended that, before and on the day of the closing, she and her husband made three cash payments to mortgagee totaling $70,000, and that the note and mortgage schedules should be reformed to reflect the payments. She submitted written receipts for three payments, totaling $80,000, allegedly signed by mortgagee and her husband. Supreme Court nevertheless dismissed the complaint, holding first that the subject matter of the claim was governed by a valid and enforceable written contract, and second, that even if mortgagor might have had a claim for reformation of the written contract, mortgagor's claim for mutual mistake was barred by laches.

In affirming, the Appellate Division noted that laches bars enforcement of a legal right when an unreasonable and inexcusable delay in enforcement causes results in prejudice to another party. Here, by delaying assertion of the reformation claim for six years, while making payments in accordance with the original note and mortgage, mortgagor prejudiced mortgagee's defense by reason of loss of evidence resulting from mortgagee's husband's death.

*****

Questions of Fact Preclude Summary Judgment in Assertion of Forgery

Wallace v. BSD-M Realty, LLC
NYLJ 9/2/16, p. 24, col. 2
AppDiv, Second Dept.
(memorandum opinion)

In an action by an alleged victim of forgery seeking to quiet title to real property, forgery victim appealed from Supreme Court's dismissal of the complaint and grant of summary judgment to an alleged bona fide purchaser on its counterclaim to estop forgery victim from asserting title to the disputed property. The Appellate Division reversed, holding that questions of fact precluded summary judgment.

Forgery victim purchased the subject property in 1995. The property consisted of ground-level commercial space below three apartments. A video store occupied the ground floor at the time of purchase, but vacated the space a year later. The premises then sat vacant. In 2008 or 2009, forgery victim discovered that the locks on the property had been changed and that a deed had been recorded purporting to transfer title to her from someone else with the same last name, although she did not know the transferee. She reported the issue to the Kings County District Attorney, who recommended that she bring a civil action. Before she did so, a series of nine other instruments were recorded against the property, including a “confirmation deed” purporting to confirm the conveyance from her to the person with the same last name, and a deed purporting to convey the property from that person to BSD-M, an alleged bona fide purchaser.

In this action, forgery victim sought a judgment cancelling all of these deeds and declaring that she is the lawful owner of the property. BSD-M counterclaimed based on equitable estoppel, and sought summary judgment on its counterclaim. Supreme Court granted the summary judgment motion.

In reversing, the Appellate Division conceded that BSD-M had made a prima facie showing that the forgery victim knew of the forgery and, despite being advised by the Kings County DA to bring a civil action, unjustifiably delayed bringing the action for more than two years. BSD-M also made a prima facie showing that it lacked knowledge of the forgery and changed its position (by purchasing the property and expending almost $400,000 on renovations) in reliance on the forgery. But the court held that BSD-M had not established, as a matter of law, that its reliance on the forgery victim's delay was justified — an essential element of the equitable estoppel claim. In particular, the court noted that before BSD-M closed on the sale, recorded instruments indicated that its seller no longer owned the premises. As a result, triable issues of fact remained about whether BSD-M's reliance was justified. Hence, the complaint should not have been dismissed, and BSD-M was not entitled to summary judgment on its counterclaims.

*****

Grantor's Action to Set Aside His Own Quitclaim Deed

Green v. 119 West 138th Street LLC
NYLJ 9/9/16, p. 18, col. 4
AppDiv, First Dept.
(3-2 decision; majority memorandum; dissenting opinion by Tom, J.)

In an action by former owner of property to set aside a quitclaim deed he had executed and to recover damages for fraud, conversion, and unjust enrichment, former owner appealed from Supreme Court's order granting summary judgment to the recipient of the quitclaim deed and declaring that recipient was the owner of the property. A divided Appellate Division reversed and remanded, concluding that issues of fact precluded summary judgment.

Green purchased the subject unimproved lot in Harlem from the City in 1973 at a tax sale. The deed was never recorded. Nearly 30 years later, in 2002, ADC became interested in purchasing the lot, and its counsel discovered tax liens and schedules indicating that a man named Logan had paid taxes on the property and that Logan's heirs had filed a bankruptcy petition listing the property as an asset of the estate. In 2004, ADC contracted to purchase the property from Logan's heirs through a bankruptcy court-approved sale for $350,000. ADC then assigned the contract to 119 West. At the request of its title insurer, 119 West brought a quiet title action in 2007 and discovered the 1973 unrecorded deed to Green. ADC's lawyer then offered Green $2,500 for a quitclaim deed, and later upped the price to $5,000. Green accepted and deposited the check. Green subsequently brought this action to set aside the deed, contending that he was unaware that the property was now worth $1 million, and that ADC and 119 West had wronged him by not informing him of the value.

In his deposition, Green conceded that he had purchased numerous other properties, and that he believed the property had been repossessed by the city when he failed to pay real estate taxes. On these facts, the trial court awarded summary judgment to ADC and 119 West, and declared the latter the lawful owner of the property.

In reversing, the Appellate Division held that 119 West and ADC had failed to establish that Green lacked standing to bring this proceeding because he was not the owner of the property. The court noted that questions of fact existed about whether Logan had ever acquired title to the property, either from Green directly or through tax foreclosure. The court also held that questions of fact remained about whether the quitclaim deed was unconscionable or procured by fraud.

Justice Tom, dissenting for himself and Justice Gische, would have affirmed Supreme Court's order. In his view, the tax lien documents naming Logan as the owner, together with Green's own admissions, conclusively established that Green was not the owner of the property, and that Logan was the owner. As a result, when 119 West obtained the property with the permission of the bankruptcy court and the Surrogate's court, 119 West because the sole owner of the property. In Justice Tom's view, the fact that Green did not own the property made the $5,000 payment for the quitclaim deed entirely reasonable.

*****

No Summary Judgment in Dispute Between Cotenants

Pichler v. Jackson
NYLJ 9/14/16, p. 21, col. 1
Supreme Ct., N.Y. Cty.
(Bannon, J.)

In out-of-possession co-tenant's action for a judgment declaring that she owns a 50% interest in the subject property as a tenant-in-common, for an accounting, for an award of an appropriate share of rental income, and for a permanent injunction prohibiting the co-tenant in possession from managing the property, both parties sought summary judgment. The court declared that the out-of-possession co-tenant owned a 50% interest in the property, but held that other issues precluded award of summary judgment to either party.

The two tenants in common derived their title from two siblings, who previously held title. The cotenant in possession resides in the premises, and her brother also lives in an apartment rent-free. The co-tenant out of possession alleges that the co-tenant in possession is also deriving rental income from rentals of other units to third parties. In this action, she sought a judgment declaring her interest, and she sought a proportionate share of income realized, or which should have been realized, from third parties. She also sought to preclude her co-tenant from managing the property.

The court granted the declaration that each party owns a 50% interest, because that fact was not in dispute. The court then rejected the argument that co-tenant in possession owed a fiduciary duty to the co-tenant out of possession, and held that there was no duty to account for the value of possession by the co-tenant and her brother. But the court held that questions of fact remained about whether co-tenant in possession had improperly dealt with income actually realized from arms' length rentals. The court also held that the record was insufficient to determine that the co-tenant in possession had failed to preserve or maintain the subject property, so that on a summary judgment motion it would be inappropriate to enjoin the co-tenant in possession from managing the property.

COMMENT

In general, any expenditure a co-tenant makes to preserve jointly-owned property — such as interest on the mortgage, tax and insurance – is a charge against the interests of his cotenants. In holding that payments including taxes and principal and interests on the mortgage established entitlement to credits, the Fourth Department, in Bailey v. Mormino, 6 AD2d 993, suggested that payments are deductible when they inure to the benefit of all tenants. Id. at 994.

Although there are few cases in point, if a cotenant incurs expenditures for the purpose of advancing the common interests of the cotenancy while occupying part of the property as a co-occupant, that co-cotenant is entitled to credits for expenditures necessary to preserve the property even when the occupying co-tenant derives personal benefit from the expenditures. In In re Estate of Hazley, 166 Misc 745, the court held that the record was insufficient to determine if the expenditures were made in the common interest, or merely for the private advantage of the cotenant who co-occupied one unit in a two-family dwelling when the other unit was rented to third-party tenants. The charges at dispute ranged from expenses of taxes, water rates, general repairs, the installation of a new heating plant, shingling and painting the house, and coal used in its heating. Id. at 748. Hypothesizing a single furnace in the property, the court indicated then the coal expenses would have been a prerequisite to the rentability of the property, thereby rendering the expenses necessary expenses of running the property for the joint interest, and therefore deductible even if the occupying co-tenant derived personal benefit from the expenditures. Id. at 749-750.

Last, New York law provides no support for precluding a cotenant from participating in the management of the property. Because each cotenant is entitled to use and occupy the property (id. at 748), one cotenant cannot enjoin another from participating in management. In cases where the tenants in common hold their estate through descent or under a will as in Minion v. Warner, 238 NY 413, although the court could concede that there exists a quasi-trust relationship might exist among the cotenants, the remedy for a breach of fiduciary duty would nevertheless lie in an action for accounting in equity. Id. at 417. Similarly, when an out-of-possession cotenant brings an action for waste based on the mismanagement of the property by the possessing cotenant, the proper remedy as provided by RPAPL § 817 is either compensatory damages or partition, and not the right to prohibit a cotenant's participation in the management of the property.

*****

Homeowners Association Properly Exercised First Refusal Right

19 Pond, Inc. v. Goldens Bridge Community Association, Inc.
NYLJ 9/16/16, p. 30, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action by contract vendee for specific performance of a sale contract, contract vendee appealed from Supreme Court's grant of summary judgment to seller and the homeowners association, which had exercises a right of first refusal. The Appellate Division affirmed, holding that the association had properly exercised its first refusal right.

The subject property was located within a homeowners association, and the association's declaration gave the association a right of first refusal over property within the association. The sale contract between seller and contract vendee expressly provided that it was subject to the association's waiver of its right of first refusal. When seller requested that the association waive its right of first refusal, the association instead exercised the right, and then contracted to purchase the property, which it subsequently resold. Contract vendee then brought this action against seller, the association, and the association's buyer, seeking specific performance of the sale contract. Supreme Court awarded summary judgment dismissing the complaint.

In affirming, the Appellate Division rejected contract vendee's argument that the association had improperly exercised the first refusal right because the vote to exercise had been conducted by e-mail. The court acknowledged that the initial e-mail vote was ineffective, but noted that the association subsequently ratified the e-mail vote by a vote in person.

No Statute of Limitations Applies to Forgery Claim

Fan-Dorf Properties, Inc. v. Classic Brownstones Unlimited, LLC
NYLJ 8/26/16, p. 23, col. 3
AppDiv, First Dept.
(memorandum opinion)

In an action by former owner to quiet title to property, former owner appealed from Supreme Court's dismissal of the complaint against subsequent owner's mortgagee. The Appellate Division reversed, holding that no statute of limitations applied to former owner's claim that the subsequent deed was forged.

Former owner, a corporation, acquired title to the subject property in 1974. In 1993, the Secretary of State dissolved the corporation for failure to pay franchise taxes. Six years later, the corporation's owner died. The following year, in 2000, a deed was executed to another corporation, followed by a chain of deeds from that second corporation to Classic Brownstones. The latter obtained mortgage loans from mortgagee bank in an amount totaling $900,000. In this action, former owner, now reinstated as a corporation, sought to quiet title, alleging that the 2000 deed was forged. In 2014, former owner added mortgagee bank as a defendant, and mortgagee bank moved to dismiss. Supreme Court granted the motion, relying on dissolution of the corporation. Former owner then moved to renew, relying on letters from the Department of Taxation and Finance consenting to its reinstatement. Supreme Court denied the motion.

The Appellate Division held that former owner was entitled to renew because the consent to reinstatement constituted new facts unavailable at the time of the original motion. The court also held, relying on Faison v. Lewis , 25 NY3d 220, that no statute of limitations applied to the forged deed claim. The court then held that former owner could not maintain the action under Business Corporation Law section 1006(b), which provides that dissolution of a corporation does not affect remedies for claims arising before dissolution, because the claim against mortgagee bank did not exist before the corporation's dissolution.

*****

Mortgage Reformed for Mutual Mistake

Gunther v. Vilceus
NYLJ 8/25/16, p. 24, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action to reform a mortgage, mortgagor appealed from Supreme Court's judgment reforming the mortgage and awarding $61,581.32 to mortgagee. The Appellate Division affirmed, holding that mortgagee had established mutual mistake.

Mortgagee sold the property to mortgagor for $550,000, and lent mortgagor $350,000 to finance the purchase. Mortgagee took back a purchase money mortgage. The note and mortgage provided that interest would accrue at the rate of 6% per year, and provided for payment of 60 monthly installments of $2,953.50, followed by a balloon payment of $206,065.79. Mortgagor made all of the payments, including the balloon payment, and mortgagee issued a satisfaction of the mortgage. Shortly thereafter, mortgagee's accountant discovered an arithmetic error in the calculation of the balloon payment, which should have been $267,647.02. Mortgagor refused to pay the balance, and mortgagee brought this action to reform the mortgage and recover the balance. Supreme Court awarded judgment to mortgagee, and mortgagor appealed.

In affirming, the Appellate Division held that mortgagee had established the existence of a mutual mistake by clear and convincing evidence. The court noted that the balloon payment was inconsistent with the mortgage amount of $350,000, and concluded that the writing did not express the agreement that the parties had actually made.

COMMENT

When a party to a mortgage claims that the written agreements do not reflect the parties' intentions, courts will reform the terms based on mutual mistake when the party seeking reformation shows by clear and convincing evidence, including parole evidence, that the written agreements do not make sense in light of the surrounding transaction. For instance, in Janowitz Bros. Venture v. 25-30 120th St. Queens Corp., 75 A.D.2d 203, the Second Department deleted a provision in a purchase money mortgage giving buyer-mortgagor a credit for interest on an anticipated second mortgage that was never consummated. The sale contract set forth an intention that the parties would execute a $12,000 mortgage to a third party who claimed an equitable interest in the property. The contract also provided that in paying off the purchase money mortgage, mortgagor would ultimately receive a credit for interest, calculated at the rate of 6%, on $12,000. At closing, however, the parties paid cash to the third party for a written release of his interest, and no mortgage was ever executed. The mortgage instrument, however was never modified to account for the payment, and still provided buyer-mortgagor with a credit for interest on $12,000. On these facts, the court held that buyer-mortgagor was not entitled to the credit, because the contract of sale made it clear that the credit had reference solely to the anticipated $12,000 mortgage. See also American Mortg. Banking v. Canestro , 201 A.D.2d 407 (where mortgage and note had only one-year term in violation of applicable banking regulations, terms were properly reformed in favor of mortgagee on grounds of mutual mistake to provide for balloon payment mortgage of three years as parties could not have intended to be in violation of banking regulations).

However, reformation of the financial terms of a mortgage will be denied on grounds of mutual mistake where the party opposing reformation can advance a plausible account for why such terms were included in the contract. For example, in Goldberg v. Danann Realty Corp. , 30 Misc. 2d 894, the court held that mortgagor was not entitled to reformation to omit a provision requiring that the purchase money mortgage be paid in five years in the face of testimony by the mortgagee's representatives that the parties had agreed on the five-year maturity date. In seeking reformation, mortgagor relied on the absence of a maturity date in the original sale contract. The court, however, held that the mortgagor had not established by clear and convincing evidence that inclusion of the maturity date was the product of mutual mistake. Id. at 896. Conversely, the court noted that the closing was adjourned for the parties to adjust their differences, and that during the adjournment the maturity of the purchase money mortgage was discussed. As a result, the five-year maturity date fit within the surrounding transaction. Id.

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Error in Setting Upset Price Does Not Provide Adequate Basis for Setting Aside Foreclosure Sale

Clinton Hill Holding 1, LLC v. Kathy & Tania, Inc.
NYLJ 8/25/16, p. 25, col. 5
AppDiv, Second Dept.
(memorandum opinion)

In an action to foreclose a mortgage, successful bidder at the foreclosure sale appealed from Supreme Court's order setting aside the foreclosure sale and vacating the referee's deed. The Appellate Division reversed, holding that Supreme Court had not established an adequate basis for setting aside the sale.

In 2009, mortgagors obtained a mortgage loan. They defaulted in 2009, and Supreme Court issued a judgment of foreclosure and sale in 2011. At that point, the original mortgagee assigned the note and mortgage to plaintiff in this action, who ultimately became the successful bidder at the foreclosure sale. When the foreclosure sale was held, in September 2013, the court-appointed referee announced an upset price higher than the amount due on the mortgage. Mortgagors did not appear at the foreclosure sale. Plaintiff was the highest bidder, and the referee executed a deed to plaintiff. In July 2014, mortgagors moved to set aside the foreclosure sale based on the referee's decision to set an upset price in excess of the amount due. Supreme Court granted the motion, and successful bidders appealed.

In reversing, the Appellate Division held that unilateral mistake, without more, is not a basis for setting aside a foreclosure sale in the absence of fraud, collusion, or misconduct that casts suspicion on the fairness of the sale. Kings County court rules allow setting an upset price that does not exceed the amount due on the mortgage, together with interest and taxes, but the rules make no provision for consequences in case of noncompliance with the rules. In this case, mortgagors presented no evidence that other bidders were present at the sale, or that any bidders were impeded by the referee's conduct. On those facts, the court concluded that the mistake did not warrant setting aside the foreclosure sale.

*****

Laches Bars Claim for Reformation of Mortgage

Diecidue v. Russo
NYLJ 9/2/16, p. 23, col. 5
AppDiv, Second Dept.
(memorandum opinion)

In an action for reformation of a mortgage, mortgagor appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that laches barred the reformation claim.

Mortgagor and her husband contracted to purchase the subject property from mortgagee in August 2007. The contract provided that the purchase would be financed with a $300,000 20-year purchase money mortgage from mortgagee. At closing, mortgagor and her husband executed a note and mortgage in accordance with the payment terms in the contract of sale. Mortgagor and her husband made the monthly payments until the husband's 2012 death, and mortgagor continued to make payments after the husband's death. Then, in 2013, mortgagor brought this action to reform the mortgage to reflect an initial balance of $230,000 rather than $300,000. She contended that, before and on the day of the closing, she and her husband made three cash payments to mortgagee totaling $70,000, and that the note and mortgage schedules should be reformed to reflect the payments. She submitted written receipts for three payments, totaling $80,000, allegedly signed by mortgagee and her husband. Supreme Court nevertheless dismissed the complaint, holding first that the subject matter of the claim was governed by a valid and enforceable written contract, and second, that even if mortgagor might have had a claim for reformation of the written contract, mortgagor's claim for mutual mistake was barred by laches.

In affirming, the Appellate Division noted that laches bars enforcement of a legal right when an unreasonable and inexcusable delay in enforcement causes results in prejudice to another party. Here, by delaying assertion of the reformation claim for six years, while making payments in accordance with the original note and mortgage, mortgagor prejudiced mortgagee's defense by reason of loss of evidence resulting from mortgagee's husband's death.

*****

Questions of Fact Preclude Summary Judgment in Assertion of Forgery

Wallace v. BSD-M Realty, LLC
NYLJ 9/2/16, p. 24, col. 2
AppDiv, Second Dept.
(memorandum opinion)

In an action by an alleged victim of forgery seeking to quiet title to real property, forgery victim appealed from Supreme Court's dismissal of the complaint and grant of summary judgment to an alleged bona fide purchaser on its counterclaim to estop forgery victim from asserting title to the disputed property. The Appellate Division reversed, holding that questions of fact precluded summary judgment.

Forgery victim purchased the subject property in 1995. The property consisted of ground-level commercial space below three apartments. A video store occupied the ground floor at the time of purchase, but vacated the space a year later. The premises then sat vacant. In 2008 or 2009, forgery victim discovered that the locks on the property had been changed and that a deed had been recorded purporting to transfer title to her from someone else with the same last name, although she did not know the transferee. She reported the issue to the Kings County District Attorney, who recommended that she bring a civil action. Before she did so, a series of nine other instruments were recorded against the property, including a “confirmation deed” purporting to confirm the conveyance from her to the person with the same last name, and a deed purporting to convey the property from that person to BSD-M, an alleged bona fide purchaser.

In this action, forgery victim sought a judgment cancelling all of these deeds and declaring that she is the lawful owner of the property. BSD-M counterclaimed based on equitable estoppel, and sought summary judgment on its counterclaim. Supreme Court granted the summary judgment motion.

In reversing, the Appellate Division conceded that BSD-M had made a prima facie showing that the forgery victim knew of the forgery and, despite being advised by the Kings County DA to bring a civil action, unjustifiably delayed bringing the action for more than two years. BSD-M also made a prima facie showing that it lacked knowledge of the forgery and changed its position (by purchasing the property and expending almost $400,000 on renovations) in reliance on the forgery. But the court held that BSD-M had not established, as a matter of law, that its reliance on the forgery victim's delay was justified — an essential element of the equitable estoppel claim. In particular, the court noted that before BSD-M closed on the sale, recorded instruments indicated that its seller no longer owned the premises. As a result, triable issues of fact remained about whether BSD-M's reliance was justified. Hence, the complaint should not have been dismissed, and BSD-M was not entitled to summary judgment on its counterclaims.

*****

Grantor's Action to Set Aside His Own Quitclaim Deed

Green v. 119 West 138th Street LLC
NYLJ 9/9/16, p. 18, col. 4
AppDiv, First Dept.
(3-2 decision; majority memorandum; dissenting opinion by Tom, J.)

In an action by former owner of property to set aside a quitclaim deed he had executed and to recover damages for fraud, conversion, and unjust enrichment, former owner appealed from Supreme Court's order granting summary judgment to the recipient of the quitclaim deed and declaring that recipient was the owner of the property. A divided Appellate Division reversed and remanded, concluding that issues of fact precluded summary judgment.

Green purchased the subject unimproved lot in Harlem from the City in 1973 at a tax sale. The deed was never recorded. Nearly 30 years later, in 2002, ADC became interested in purchasing the lot, and its counsel discovered tax liens and schedules indicating that a man named Logan had paid taxes on the property and that Logan's heirs had filed a bankruptcy petition listing the property as an asset of the estate. In 2004, ADC contracted to purchase the property from Logan's heirs through a bankruptcy court-approved sale for $350,000. ADC then assigned the contract to 119 West. At the request of its title insurer, 119 West brought a quiet title action in 2007 and discovered the 1973 unrecorded deed to Green. ADC's lawyer then offered Green $2,500 for a quitclaim deed, and later upped the price to $5,000. Green accepted and deposited the check. Green subsequently brought this action to set aside the deed, contending that he was unaware that the property was now worth $1 million, and that ADC and 119 West had wronged him by not informing him of the value.

In his deposition, Green conceded that he had purchased numerous other properties, and that he believed the property had been repossessed by the city when he failed to pay real estate taxes. On these facts, the trial court awarded summary judgment to ADC and 119 West, and declared the latter the lawful owner of the property.

In reversing, the Appellate Division held that 119 West and ADC had failed to establish that Green lacked standing to bring this proceeding because he was not the owner of the property. The court noted that questions of fact existed about whether Logan had ever acquired title to the property, either from Green directly or through tax foreclosure. The court also held that questions of fact remained about whether the quitclaim deed was unconscionable or procured by fraud.

Justice Tom, dissenting for himself and Justice Gische, would have affirmed Supreme Court's order. In his view, the tax lien documents naming Logan as the owner, together with Green's own admissions, conclusively established that Green was not the owner of the property, and that Logan was the owner. As a result, when 119 West obtained the property with the permission of the bankruptcy court and the Surrogate's court, 119 West because the sole owner of the property. In Justice Tom's view, the fact that Green did not own the property made the $5,000 payment for the quitclaim deed entirely reasonable.

*****

No Summary Judgment in Dispute Between Cotenants

Pichler v. Jackson
NYLJ 9/14/16, p. 21, col. 1
Supreme Ct., N.Y. Cty.
(Bannon, J.)

In out-of-possession co-tenant's action for a judgment declaring that she owns a 50% interest in the subject property as a tenant-in-common, for an accounting, for an award of an appropriate share of rental income, and for a permanent injunction prohibiting the co-tenant in possession from managing the property, both parties sought summary judgment. The court declared that the out-of-possession co-tenant owned a 50% interest in the property, but held that other issues precluded award of summary judgment to either party.

The two tenants in common derived their title from two siblings, who previously held title. The cotenant in possession resides in the premises, and her brother also lives in an apartment rent-free. The co-tenant out of possession alleges that the co-tenant in possession is also deriving rental income from rentals of other units to third parties. In this action, she sought a judgment declaring her interest, and she sought a proportionate share of income realized, or which should have been realized, from third parties. She also sought to preclude her co-tenant from managing the property.

The court granted the declaration that each party owns a 50% interest, because that fact was not in dispute. The court then rejected the argument that co-tenant in possession owed a fiduciary duty to the co-tenant out of possession, and held that there was no duty to account for the value of possession by the co-tenant and her brother. But the court held that questions of fact remained about whether co-tenant in possession had improperly dealt with income actually realized from arms' length rentals. The court also held that the record was insufficient to determine that the co-tenant in possession had failed to preserve or maintain the subject property, so that on a summary judgment motion it would be inappropriate to enjoin the co-tenant in possession from managing the property.

COMMENT

In general, any expenditure a co-tenant makes to preserve jointly-owned property — such as interest on the mortgage, tax and insurance – is a charge against the interests of his cotenants. In holding that payments including taxes and principal and interests on the mortgage established entitlement to credits, the Fourth Department, in Bailey v. Mormino , 6 AD2d 993, suggested that payments are deductible when they inure to the benefit of all tenants. Id. at 994.

Although there are few cases in point, if a cotenant incurs expenditures for the purpose of advancing the common interests of the cotenancy while occupying part of the property as a co-occupant, that co-cotenant is entitled to credits for expenditures necessary to preserve the property even when the occupying co-tenant derives personal benefit from the expenditures. In In re Estate of Hazley, 166 Misc 745, the court held that the record was insufficient to determine if the expenditures were made in the common interest, or merely for the private advantage of the cotenant who co-occupied one unit in a two-family dwelling when the other unit was rented to third-party tenants. The charges at dispute ranged from expenses of taxes, water rates, general repairs, the installation of a new heating plant, shingling and painting the house, and coal used in its heating. Id. at 748. Hypothesizing a single furnace in the property, the court indicated then the coal expenses would have been a prerequisite to the rentability of the property, thereby rendering the expenses necessary expenses of running the property for the joint interest, and therefore deductible even if the occupying co-tenant derived personal benefit from the expenditures. Id. at 749-750.

Last, New York law provides no support for precluding a cotenant from participating in the management of the property. Because each cotenant is entitled to use and occupy the property (id. at 748), one cotenant cannot enjoin another from participating in management. In cases where the tenants in common hold their estate through descent or under a will as in Minion v. Warner , 238 NY 413, although the court could concede that there exists a quasi-trust relationship might exist among the cotenants, the remedy for a breach of fiduciary duty would nevertheless lie in an action for accounting in equity. Id. at 417. Similarly, when an out-of-possession cotenant brings an action for waste based on the mismanagement of the property by the possessing cotenant, the proper remedy as provided by RPAPL § 817 is either compensatory damages or partition, and not the right to prohibit a cotenant's participation in the management of the property.

*****

Homeowners Association Properly Exercised First Refusal Right

19 Pond, Inc. v. Goldens Bridge Community Association, Inc.
NYLJ 9/16/16, p. 30, col. 6
AppDiv, Second Dept.
(memorandum opinion)

In an action by contract vendee for specific performance of a sale contract, contract vendee appealed from Supreme Court's grant of summary judgment to seller and the homeowners association, which had exercises a right of first refusal. The Appellate Division affirmed, holding that the association had properly exercised its first refusal right.

The subject property was located within a homeowners association, and the association's declaration gave the association a right of first refusal over property within the association. The sale contract between seller and contract vendee expressly provided that it was subject to the association's waiver of its right of first refusal. When seller requested that the association waive its right of first refusal, the association instead exercised the right, and then contracted to purchase the property, which it subsequently resold. Contract vendee then brought this action against seller, the association, and the association's buyer, seeking specific performance of the sale contract. Supreme Court awarded summary judgment dismissing the complaint.

In affirming, the Appellate Division rejected contract vendee's argument that the association had improperly exercised the first refusal right because the vote to exercise had been conducted by e-mail. The court acknowledged that the initial e-mail vote was ineffective, but noted that the association subsequently ratified the e-mail vote by a vote in person.