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Real Property Law

By ssalkin
October 01, 2018
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Neighborhood Garden Users May Establish Adverse Possession Claim

Children's Magical Garden, Inc. v. Norfolk Street Development, LLC, NYLJ 7/16/18, p. 18., col. 1, AppDiv, First Dept. (Opinion by Tom, J; concurring opinion by Friedman, J.P.)

In an action by operators of a community garden to establish title by adverse possession, record title holder appealed from Supreme Court's denial of its motion to dismiss. The Appellate Division affirmed, holding that the complaint adequately alleged continuous possession under a claim of right.

The complaint alleges that beginning in 1985, neighborhood activists began to clear debris from the subject corner lot in lower Manhattan and began planting trees, shrubs and vegetables. The complaint alleges that the activists erected a chain link fence around the garden, and that only members of the unincorporated association of activists had keys that would unlock the gate. The complaint also alleges that members permitted various school and community events to take place in the garden. In 1999, representatives of the garden's record owner entered the premises, tore down part of the fence, chopped down a tree and damaged a children's clubhouse. Members of the unincorporated association immediately removed the makeshift fence erected by record owner's representatives, and repaired the damage. In 2012, members of the association incorporated. Record title to the garden parcel had changed hands several times, and in 2014, the current record owner filed an application to build a six-story residential building on the lot, prompting the now-incorporated association to bring this action seeking a declaration that it has acquired title to the parcel by adverse possession. Supreme Court denied record owner's motion to dismiss, and record owner appealed.

In affirming, the Appellate Division rejected record owner's argument that the association was not in privity with members who had occupied the parcel before the association's incorporation in 2012. The court concluded that based on the allegations of the complaint, members of the unincorporated association had acquired title by adverse possession before 2012 and could transfer their interest to the corporation upon its incorporation in 2012.The court concluded that the intrusion by record owner representatives in 1999 did not require dismissal of the complaint because, first, members of the association could have acquired title as early as 1995, and second, because the intrusion did not interrupt the members' exclusive possession since they took swift action to repair the damages caused by the unidentified intruders. Finally, the court concluded that the allegations in the complaint were, under pre-2008 law, sufficient to establish the requisite hostility to support an adverse possession claim because the possession was of a type that gave the record owner a right to bring an action to eject the possessor.

Comment

Sections 12 and 13 of the General Associations Law, enacted in 1920, do not explicitly give unincorporated associations the right to own real property, but, by authorizing actions by and against the president and treasurer of the association, the statutes effectively establish that the officers can hold title for the benefit of association members. Thus, when title is erroneously registered in the name of the association, courts reform the deed to reflect ownership by corporate officers. Thus, in Meiselbach v. Banner, 72 N.Y.S.2d 732, contract vendees from an unincorporated association sought specific performance, contending that the deed to the association was defective because the association could not own, and therefore could not effectively transfer, real property. The court ordered that the deed be reformed to reflect a transfer to the association's treasurer, who would then be required to deliver a deed to the purchasers.

Even before enactment of sections 12 and 13, the Court of Appeals had established, in Gallupville Reform Church v. Schoolcraft, 65 N.Y. 134, that occupation by members of an unincorporated association could ripen into title by adverse possession once the members incorporated the association. In Gallupville, a newly incorporated church proved that its members had occupied the disputed property continuously for the statutory period. The Court of Appeals reasoned that even if the true owner could not have brought an action against the association, it could have brought an ejectment action against the association's officers. With the enactment of sections 12 and 13 of the General Associations Law, the true owner acquired an explicit statutory right to bring an action against association officers, strengthening the ability of associations to accrue time towards the adverse possession period.

The primary difficulty facing associations seeking to establish title by adverse possession is providing proof that the association had a definite membership. For instance, in ATIFA v. Shairzad, 4 Misc. 3d 1007, the court held that a deed to an unincorporated association was invalid because the association had failed to prove it had a definite membership. The same obstacle might arise when an association contends that it has accrued time towards the adverse possession period.

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Purchaser Entitled to Return of Down Payment Upon Revocation of Mortgage Commitment After Expiration of Contingency Period

Chahalis v. Roberta Ebert Irrevocable Trust, NYLJ 7/13/18, p. 26., col. 3, AppDiv, Second Dept. (memorandum opinion)

In condominium purchaser's action for breach of contract, seller appealed from Supreme Court's grant of summary judgment to purchaser. The Appellate Division affirmed, holding that purchaser was entitled to return of his down payment when mortgagee bank revoked its mortgage commitment after expiration of the contract's mortgage contingency period.

The contract of sale included a mortgage contingency clause making purchaser's obligation to purchase conditional upon obtaining a mortgage commitment within a specified time period. Purchaser obtained the commitment and informed the seller. The following month, however, purchaser's employer notified him that his employment was being terminated. The lender then revoked its mortgage commitment. When purchaser requested return of his down payment, seller refused and indicated its intention to return the down payment. Purchaser then brought this action. When seller moved to dismiss, purchaser moved for summary judgment. Supreme Court granted purchaser's motion, and seller appealed.

In affirming, the Appellate Division held that when a mortgage commitment is revoked after expiration of the contract's mortgage contingency period, the purchaser is entitled to return of its deposit when the revocation was not attributable to bad faith on the purchaser's part, in this case, the commitment was subject to reverification of employment, and the purchaser did not act in bad faith. As a result, purchaser was entitled to return of the down payment.

Comment

When a lender revokes a mortgage commitment following the expiration of the contract's mortgage contingency period, courts have increasingly held that the purchaser is entitled to return of its down payment, unless revocation is caused by the purchaser's bad faith. For instance, in Blair v. O'Donnell, 85 A.D.3d 954, the court awarded purchaser summary judgment on a claim for return of its down payment. When the lender revoked its mortgage commitment because a survey revealed encroachments on the property the Second Department acknowledged that the mortgage contingency period had elapsed, but held that because the contract contained no provision addressing revocation of the commitment, the seller could not retain the down payment. Id. at 955-56. The court cited evidence that purchaser had acted in good faith, while the sellers produced only speculative and conclusory assertions of bad faith by the purchaser. Id. at 956. However, in an earlier case, Roga v. Westin, 212 A.D.2d 685, the court awarded seller summary judgment on a claim to retain the down payment, emphasizing that purchaser had failed to provide notice of revocation within five business days of the commitment date, thus waiving her right to cancel the contract. Id. at 686. Roga appears inconsistent with Blair and subsequent cases.

A buyer does not act in bad faith merely because the lender discovers new information about the buyer that results in revocation. In MD3 Holdings, LLC v. Buerkle, 159 A.D.3d 1483, the lender revoked a mortgage commitment after the mortgage contingency period when the buyer produced additional projections on the financial viability of the planned use of the building. The court held that the buyer was entitled to his down payment, as providing new information does not constitute bad faith, but rather honors the buyer's contractual duty of fair dealing to the seller. Id. at 1484. In Creighton v. Milbauer, 191 A.D.2d 162, the court denied seller's motion for summary judgment was denied When the lender revoked its mortgage commitment because the buyer lost her job. Id. The court noted that the contract was silent on this matter and indicated that losing employment does not constitute bad faith.

By contrast, where explicit language allocates the risk of subsequent revocation to the buyer, courts allow the seller to retain the down payment. For example, in Arnold v. Birnbaum, 193 A.D.2d 710, the Second Department held that the sellers were entitled to the down payment due to the express language of the contract. The contract was conditioned on the buyers' obtaining a mortgage commitment within a 45-day contingency period, but provided that when a mortgage commitment is obtained, “the contract becomes binding as if the mortgage contingency clause 'had not been written.'” Id. at 711. The court held that because the commitment was revoked well after the expiration of the contingency period, the buyer could not cancel the contract. Based on similar language, the court in Mendez v. Abel, 35 Misc.2d 61, held that the purchaser was bound to the contract upon receiving a mortgage commitment, regardless of whether it was later revoked. The mortgage contingency provision provided that once the purchaser obtained a mortgage commitment, he would have no right to terminate the agreement, “irrespective of whether purchaser fails to satisfy any conditions which may be contained in said commitment.” Id. The court stated that because of this provision, the purchaser could not cancel the contract of sale based on the revocation. Id.

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Law Firm Not Liable to Non-Client for Turnover of Escrow Funds

Brassell v. Harborview Abstract, Inc., NYLJ 7/27/18, p. 24., col. 5, AppDiv, Second Dept. (memorandum opinion)

In an action by co-tenant against a law firm for wrongfully turning over escrow funds to the other co-tenant (his brother), the law firm appealed from Supreme Court's grant of summary judgment to plaintiff co-tenant. The Appellate Division reversed and granted summary judgment to the law firm, holding that the law firm breached no duty to the plaintiff co-tenant.

The two brothers, Len and Robert, inherited property as co-tenants and sold the property to Smith in 2005. At closing, the parties agreed that the title insurer would hold $62,000 in escrow pending production of a satisfaction of a prior mortgage on the property. A few months later, Robert obtained the satisfaction and retained the law firm to secure the release of the $62,000. The title insurer released the $62,000 to the law firm along with a copy of the title report (which the law firm had requested). Without reviewing the title report, the law firm paid the entire $62,000 to Robert. Len then brought this action against, among others, the law firm, to recover his share of the $62,000. Supreme Court awarded Len $31,000 against the law firm for breach of an escrow agreement. The law firm appealed.

In reversing, the Appellate Division held that the $62,000 paid to the law firm by the title insurer were not conditioned on payment of half of the funds to Len, and also held that the firm had never agreed to undertake any obligations on behalf of Len. The court concluded that the firm had established a prima facie case that no escrow agreement had been created between Len and the firm, and Len failed to raise any triable question of fact about whether the firm breached any duties to him.

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Law Firm Not Exempt From Claim Under RPL 265-B

De Guaman v. American Hope Group, NYLJ 7/27/18, p. 26., col. 1, AppDiv, Second Dept. (memorandum opinion)

In an action by mortgagors against consultants and a law firm for violations of Real Property Law section 265-b and General Business Law section 349, the law firm appealed from Supreme Court's denial of its motion to dismiss the complaint against it. The Appellate Division affirmed, holding that the complaint stated causes of action against the firm.

When mortgagors became delinquent on mortgages to non-parties, they responded to advertisements by the consultant and the law firm. These advertisements offered to provide consulting services to obtain loan modifications, including reduction of the principal balance and the interest rate on mortgage loans. Mortgagors then entered into written contracts by the terms of which the consultant and the law firm would provide consulting services in return for an upfront fee and monthly installment services. The complaint alleges that those services were never provided. The law firm moved to dismiss, but Supreme Court denied the motion.

In affirming, the Appellate Division first dealt with the claim that the firm had violated section 265-b of the Real Property Law, which regulates provision of services by distressed property consultants. The statute includes an exemption for attorneys “directly providing consulting services to a homeowner in the course of his or her regular legal practice.” The court held the exemption inapplicable in this case because mortgagors alleged that they never met with attorneys from the law firm. The court then rejected the law firm's contention that section 349 of the General Business Law was inapplicable because the dispute in this case was a mere contract dispute. The court noted that the practices alleged by mortgagors were not unique to these parties, and involved an extensive marketing scheme with an impact on consumers at large.

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Presumption of Due Execution Rebutted

Kupperstock v. Kupperstock, NYLJ 7/26/18, p. 28., col. 6, AppDiv, Second Dept. (memorandum opinion)

In wife's action to cancel and discharge a mortgage in favor of husband's father, husband appealed from Supreme Court's judgment, after nonjury trial, directing discharge and cancellation of the mortgage. The Appellate Division affirmed, holding that wife had rebutted the presumption of due execution of the mortgage.

Husband and wife were married in 1981 and have four children. In 1987, wife purchased the subject property, the family home. Nine years later, the wife brought an action for divorce, and the parties entered into a stipulation of settlement awarding the property exclusively to the wife. A few weeks after the stipulation of settlement was signed, husband recorded a mortgage against the property that had purportedly been given by the wife to husband's father in 1994. The mortgage was for $840,000, about $260,000 more than the purchase price of the property six years earlier. The mortgage provided for no payments of principal or interest until 2017, when all principal and interest would be due to husband's father, who died in 1996. The wife then brought this action against the husband individually and as administrator of his father's estate seeking cancellation and discharge of the mortgage. Supreme Court granted the cancellation and discharge, and the husband appealed.

In affirming, the Appellate Division upheld Supreme Court's determination that wife had rebutted the presumption of due execution of the mortgage. In particular, the court noted that neither the documents prepared in connection with the house purchase nor the documents prepared in connection with the divorce settlement made any reference to the mortgage. Moreover, the terms of the mortgage made little financial sense for husband's father, since no interest or principal would be due until 2017, when he would have been 114 years old. Finally, the court focused on evidence that the wife was unable to communicate with her father-in-law, and on the fact that the father-in-law was not in a financial position to lend large sums of money. This evidence lent support to Supreme Court's conclusion that the husband had manufactured the mortgage, and to the court's discharge and cancellation of the mortgage.

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Title Insurance Regulation Annulled

Matter of New York State Land Title Association v. New York State Department of Financial Services, 2018 WL 3306755, Sup. Ct., N.Y. Cty (Rakower, J.)

In an article 78 proceeding, title insurance association challenged regulations promulgated by the state department of financial services (DFS) Supreme Court granted the petition, annulling Insurance Regulation 208.

Section 6409(d) of the Insurance Law prohibits title insurance companies from offering rebates, or from paying commissions or “any other consideration of valuable thing, as an inducement for, or as compensation for, any title insurance business ….” In 2017, acting under the auspices of the statute, DFS promulgated regulation 208, which included new prohibitions. First, NYCRR 228.2 prohibited title insurance companies from providing meals, beverages, and entertainment including tickets to sporting events and golf outings as marketing tools, even if the benefits were not part of a quid pro quo. Second, NYCRR 228.5(d) made title insurance companies responsible for payment of the title insurance closer and prohibited the closer from receiving compensation from the applicant, but included an exception for closers who are note employees of the title insurance company or agent. The title insurance association and several title insurers challenged these regulations as beyond the authority conferred on DFS by section 6409 of the insurance law.

In granting the petition, Supreme Court concluded that the legislature did not intend to prohibit ordinary marketing and entertainment expenses, but only to prohibit commissions and rebates. The court labeled “absurd” the proposition that the legislature intended to prevent title insurance companies from marketing themselves. The court then held that section 228.5 was arbitrary and capricious because it singled out in-house closers for unfavorable treatment without a rational basis.

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