Real Property Law

In affirming, the Appellate Division concluded that contract vendee had failed to present triable questions of fact about whether seller was aware of or responsible for the gas tanks. The court noted that the former owner of the property, a managing member of the seller, testified that he was unaware of the gas tanks. The court also held that the governmental “E” designation on the property did not show that gas tanks were located on the property, because that designation would be issued even if there were gas tanks on adjacent properties. Moreover, governmental websites indicated that gas tanks were located on adjacent properties and not on the subject property. Finally, the court held that seller's failure to disclose $87,000 in rent arrears was not material in the context of a $32,500,000 transaction, and did not justify contract vendee's failure to perform.

COMMENT

Generally, a seller is not liable for failure to disclose the environmental condition of the premises unless the condition is within peculiar knowledge of the seller. In Commander Terminals, LLC v. Commander Oil Corp., 71 A.D.3d 623, the Second Department denied purchaser's summary judgment motion on a fraud claim against a seller of an oil storage facility who failed to disclose an oil seepage problem on the premises. Id. at 623,626. The court held that triable issues of fact remained about whether the seller had peculiar knowledge about the seepage problem. Before the sale, the sellers were informed by New York State Department of Environmental Conservation of significant petroleum seepage from the terminal into the adjacent waters, but they did not disclose such issue. Id. at 625. Although the buyers had access to an environmental audit report, which specified some environmental contamination of the premises, the report never mentioned the oil leaching issue. Commander Terminals, LLC, 2008 WL 2572817 at *4.

However, no triable issues exist as to whether environmental conditions are peculiarly within the seller's knowledge if information about the questionable history of the property is available to the buyer. In C.V. Co. LLC v. Ban Realty Corp., 2009 WL 3823252, the Supreme Court of Nassau County granted summary judgment to seller on it claim to recover on purchaser's mortgage note and guarantee, dismissing purchaser's counterclaim for fraud based on seller's failure to disclose environmental contamination. The purchasers were provided by a broker with the Phase I Environmental Study, which revealed that an underground gasoline tank was installed on Dec. 9, 1970, that “underground storage tanks” were removed in June 1981, that the site was listed in the New York State spills Database, and that a waste oil tank spilled some oil on Sept. 5, 1989. Id. at *4. The court concluded that the contamination at the site was not peculiarly within the seller's knowledge. Id. at *7.

If a seller has peculiar knowledge about the environmental condition of the premises, buyer's claim is not barred by buyer's contract representation that it conducted an inspection and did not rely on any warranties or representations made by the seller In Tahini Investments, Ltd. v. Bobrowsky, 99 A.D.2d 489, the Second Department reversed the trial court's dismissal of purchaser's fraud complaint, holding that the contract's specific disclaimer clause did not preclude buyer's claim of reliance on seller's representation that the property had been principally used as a horse farm. After the closing, purchaser's workers discovered buried rusted drums containing nontoxic industrial waste which could be potentially hazardous to livestock. Id. The contract provided that: “The Purchaser represents … that he has examined . . . to his full satisfaction the physical nature and condition of the land and property … to be sold,” and that “the purchaser is not relying upon any … warranties or any representations as to the physical nature or condition of the property.” Id. at 433. After deciding that there were issues as to whether the existence of contamination was within the peculiar knowledge of the seller, the court concluded that the purchaser's claim was not barred by a disclaimer providing that “[T]he Purchaser represents … that he has examined … to his full satisfaction the physical nature and condition of the land and property … to be sold,” and that “the purchaser is not relying upon any … warranties or any representations as to the physical nature or condition of the property.” Id.

Divestiture Agreement
Kozak v. Porada
2017 WL 4816893
AppDiv, Third Dept., 10/26/17
(Opinion by Garry, J.)

In an action by cotenants to enforce the terms of a divestiture agreement and to set aside a conveyance, plaintiff cotenants appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that the divestiture agreement violated the Rule Against Perpetuities.

Five cotenants purchased 85 acres of land and executed a contract in which they agreed that if any cotenant were to sell his interest, he would be required to offer it first to the remaining tenants in common. Two of the five cotenants later sold their interests to the others. A third cotenant died, leaving his wife as executor. In December 2008, one of the surviving cotenants, Lawrence Porada, executed a deed transferring his interest to his son, Keith Porada. Lawrence later died and his wife became executor. Plaintiffs, the remaining original cotenant and the wife of the deceased cotenant, brought this action to enforce the divestiture agreement and to set aside the conveyance to Keith Porada. Supreme Court dismissed the complaint, holding that the divestiture agreement violated the Rule Against Perpetuities. Plaintiff cotenants appealed.

In affirming, the Appellate Division first held that although the divestiture agreement described the future interests it created as options to purchase, they were, in fact, rights of first refusal because they restricted a willing seller's power to sell. The court then noted that rights of first refusal are, with certain exceptions, generally subject to the Rule Against Perpetuities. The court found the exceptions inapplicable and held that because the rights of first refusal created by the agreement could vest outside the time period established by EPTL 9-1.1(b), those rights were invalid. The court concluded that by the terms of the agreement, the rights were binding on heirs and assigns of the original cotenants. As a result, the rights of first refusal could be exercised more than 21 years after the lives in being at the time the rights were created, thus violating the Rule Against Perpetuities.

COMMENT

The Rule Against Perpetuities voids first-refusal rights that “run with the land” and purport to bind successors-in-interest of the original holder of the first refusal right. Thus, Martinsen v. Camperlino, 81 A.D.3d 256, 258, held that a first-refusal agreement that bound successors indefinitely violated the Rule. Martinsen arose when the seller retained a small portion of her land and granted the buyer a first-refusal right should seller or her successors ever choose to sell the remaining plot. Id. at 257. Later, seller's successor sued for a declaration that the first-refusal agreement was invalid. Id. at 258. The court found that the agreement ran with the land and did not impose a temporal limitation on remote vesting, so buyer's interest could vest more than 21 years after the original seller and buyer's deaths. Id. Thus, the court held that the agreement violated the Rule. Id.

On the other hand, courts avoid perpetuities issues by construing ambiguous agreements to expire at the death of the original holder of the first refusal right. For example, in Adler v. Simpson, 203 A.D.2d 691, 693, the Third Department construed a first-refusal agreement as one not running with the land to save it from violating the Rule. It reasoned that “the parties intended [the first-refusal agreement] to be a personal agreement, binding on themselves only and not their successors and assigns,” because it would otherwise violate the Rule. Id. There, the seller sold a portion of his property to the buyer, who asked for a right of first refusal to the remaining unsold portion. Id. at 691. While the conveyance clearly granted the parcel to the buyer and his successors, the first-refusal agreement, executed on the same day, only purported to bind the buyer himself. Id. at 692.

As with rights of first refusal, where an option agreement leaves the option's duration unclear, courts typically construe the option as lasting only for the lifetime of the original option holder. Reynolds v. Gagen, 292 A.D.2d 310. In Reynolds, two parties had contracted to buy some real property, but after one party could not meet her financial obligations, the other agreed to buy the property and give the other an option to buy half the interest later. Id. at 310. The agreement stated: “'This agreement shall be binding on both of us and our heirs and assigns.'” Id. When the option holder later sought to exercise her option, the purchaser refused, claiming that the agreement violated the Rule. Id. at 311. Although the agreement had no express temporal limitation, the court construed the “heirs and assigns” language as merely providing that if the purchaser died, her heirs and successors would have to honor the agreement. Id. Yet if option holder died before exercising her right, the right “would die with her” and avoid the Rule. Id.

But where an option, by its terms, could last indefinitely, the option violates the Rule. In Dimon v. Starr, 299 A .D.2d 313, the Second Department held unenforceable an option to purchase upon the earlier of sale or subdivision of property when the option agreement imposed no requirement that the property ever be sold or subdivided. Mortgagee had assigned its mortgage on a large parcel, and its right to foreclose, but reserved an option to purchase two lots, or to receive additional payment, if the assignee purchased at the foreclosure sale and subsequently sold or subdivided the land. When the mortgagee sought to exercise its option the Second Department emphasized that “there [was] no time limitation on the duration of the agreement, which leads to the conclusion that the parties intended the [option holder]'s future right to last indefinitely,” thereby violating the Rule. Id.

Unrecorded Mortgage
Citimortgage, Inc. v. Chouen
2017 WL 4799846
AppDiv, Second Dept., 10/25/17
(memorandum opinion)

In mortgagee's action to quiet title to real property, mortgagor appealed from Supreme Court's order granting summary judgment declaring that mortgagee is equitably subrogated to an earlier first mortgage lien. The Appellate Division affirmed, holding that the subrogation doctrine was applicable, and that the mortgage lien survived mortgagor's bankruptcy.

Homeside Lending recorded a mortgage on the property in August 1993. On Nov. 11, 2002, mortgagor executed a note for $175,000, secured by a mortgage in favor of Citimortgage's predecessor. Of that amount, $152,616.52 was paid to satisfy Homeside's prior mortgage. The Nov. 11, 2002 mortgage was lost or destroyed, and was never recorded. In October 2011, mortgagor filed a bankruptcy proceeding and listed Citimortgage as a creditor. On Feb. 7, 2012, mortgagor received a bankruptcy discharge. Citimortgage then brought this action to quiet title to its mortgage interest in the property, asserting a right to the $175,000 mortgage or, in the alternative, that it was equitably subrogated to the Homeside Lending mortgage.

Supreme Court granted summary judgment to Citimortgage to the extent of declaring that Citimortgage was equitably subrogated to the Homeside Mortgage in the sum of $152.616.52. Mortgagor appealed.

In affirming, the Appellate Division held that Citibank had established, prima facie, that the 2002 mortgage loan had been used to discharge the prior Homeside mortgage lien. Because mortgagor had raised to triable issues of fact, Citimortgage was entitled to summary judgment. The court also concluded that Citimortgage's security interest survived the discharge in bankruptcy.

COMMENT

Had it not been for the equitable subrogation doctrine, mortgagee bank's unrecorded mortgage would have been discharged in bankruptcy. The bankruptcy statute's strongarm provision gives the bankruptcy trustee power to avoid any obligation of the bankrupt debtor that could be avoided by a bona fide purchaser of real property. 11 USC 544(a)(3). State law determines what obligations a bona fide purchaser can avoid, and in New York, the recording act protects bona fide purchasers against unrecorded mortgages. Real Property Law section 291. See also, Westbrook v. Gleason, 89 N.Y. 64 (Court of Appeals establishes that recording act accords priority to bona fide purchasers over unrecorded mortgages).

Although an unrecorded mortgage does not enjoy priority over a bona fide purchaser, an unrecorded mortgage on real property does create an equitable lien superior to the rights of judgment creditors of the mortgagor. In Sullivan v. Corn Exch. Bank, 154 A.D. 292 (1912), mortgagor borrowed money from mortgagee, secured by property. After that transaction, but before the mortgage was recorded, two other creditors obtained judgment against mortgagor. The court ruled that mortgagee's lien had priority before the other judgment creditors' liens, notwithstanding the lack of record.

CEMA Suffices
Weiss v. Phillips
NYLJ 11/30/17, p. 21, col. 1
AppDiv, First Dept.
(4-1 decision; majority opinion by Renwick, J; dissenting opinion by Gesmer, J.)

In a mortgage foreclosure action, mortgage appealed from Supreme Court's grant of summary judgment to mortgagee. The Appellate Division affirmed, holding that in light of mortgagor's execution of a consolidation and extension agreement (CEMA), mortgagee's failure to produce the original mortgage note did not preclude a grant of summary judgment to mortgagee.

Phillips purchased a distressed parcel in Harlem, and then transferred the property to McCarthy so that McCarthy could obtain a mortgage, which Phillips would then use to make repairs and pay accumulated debt. The parties understood that Phillips would make the loan payments and McCarthy would transfer title back to Phillips at a later date. Four and a half years later, in 2004, Phillips' lawyer sent a paralegal to obtain McCarthy's signature on a deed back to Phillips. The paralegal, however, presented McCarthy with a blank deed, which McCarthy signed. The paralegal then inserted the name of the paralegal's mother as grantee. Then, in December 2005, the mother transferred title to herself and the paralegal, and the two of them obtained a mortgage loan from Weiss.

The mother and the paralegal defaulted on the payments. Lawsuits followed, and ultimately, the mother and the paralegal transferred title back to Phillips. Philips then executed a CEMA by the terms of which he acknowledged that the mortgage and note remained in effect, and that the mother and the paralegal had no defenses. Phillips did not, however, personally assume payment of the $500,000 note. Weiss, as mortgagee, agreed to forbear from foreclosing the mortgage for one year, and Phillips agreed to make payments on the mortgage. Phillips made one payment and then stopped, leading to this foreclosure action. Supreme Court awarded summary judgment to mortgagee Weiss.

In affirming, the Appellate Division held that Weiss had adequately supported his summary judgment motion by submitting the CEMA and the mortgage contract, along with unchallenged deposition testimony as to the existence of the note and nonpayment. The court's majority emphasized that this was not the typical foreclosure transaction, in which the mortgagee would be obligated to present the unpaid note and mortgage. Justice Gesmer, dissenting, contended that the mortgagee had presented inadequate proof that a note was ever signed or that Weiss had lent $500,000 to any party. In her view, evidence of the note's existence was not an
adequate substitute.