Real Property Law

In reversing Supreme Court's invalidation of the prohibition on meals and entertainment expenses, the Appellate Division concluded that the statute unambiguously prohibited expenditures meant as inducements, even if the expenditures were not quid-pro-quo payments concerning a specific act. The court noted that extravagant gifts to referral sources involved a tacit expectation that the recipient would provide a reliable stream of referrals. The court did, however, affirm Supreme Court's invalidation of the prohibition on fees for in-house closers, concluding that DFS had not provided any rational basis for distinguishing between in-house closers and independent closers. Similarly, the court invalidated the 200% cap on fees for ancillary services, noting that DFS had provided no empirical documentation to support the cap.

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Purchaser's Willful Default/Down Payment

Goetz v. Trinidad 2019 WL 138540 AppDiv, Second Dept., 1/9/19 (memorandum opinion)

In an action by sellers to retain a down payment, sellers appealed from Supreme Court's denial of their summary judgment motion and grant of summary judgment to purchaser. The Appellate Division modified to deny summary judgment to both parties, holding that questions of fact remained about whether purchaser's default was willful.

On Aug. 21, 2015, the parties executed a contract of sale and purchaser paid sellers a down payment of $37,000, which was less than 10% of the purchase price. The contract provided for closing on or about 30 days after purchaser's lawyer received the executed contract, and provided that seller was entitled to retain the down payment if purchaser “willfully” defaulted on the contract. The closing never occurred. On Jan. 13, 2016, sellers' lawyer sent a letter to purchaser's lawyer scheduling closing for February 12 and indicating that time was of the essence. Purchaser did not appear, although sellers were ready, willing, and able to close. Sellers then brought this action to retain the down payment. When they sought summary judgment, Supreme Court searched the record and awarded summary judgment to purchaser. Sellers appealed.

In modifying, the Appellate Division concluded that sellers had made out a prima facie case for retention of the deposit by showing that they were ready, willing, and able to close. But the court held that questions of fact remained about whether purchaser's default was “willful” within the meaning of the contract. The court noted that purchaser had produced a statement of credit denial from his lender indicating that the lender had denied his application for a renewal or extension of credit. In light of that statement, the court remanded for a determination whether purchaser's default was willful.

Comment

In the absence of a mortgage contingency clause or any other indication that seller should bear the risk that purchaser will be unable to obtain financing, at least one court has held that purchaser's failure to obtain funds for closing constitutes willful default entitling seller to retain the purchaser's down payment. In Evans v. Norris, 69 A.D.2d 829, the Second Department held that buyer's failure of securing funds from a third party assignee was “willful default” entitling seller to retain the buyer's down payment. The court pointed out that the contract of sale did not mention the assignee and “was not conditioned in any way upon the vendee's success in securing the necessary funds to complete the purchase.”

By contrast, when the sale contract includes a mortgage contingency clause, two Second Department cases have held that purchaser's failure to close does not constitute willful default when the failure is due to lender's revocation of its loan commitment, even after the mortgage contingency period has expired. These cases have allowed the purchaser to exit the contract without penalty, which in effect extends the protection of the mortgage contingency clause. In Bobrowsky v. Landes, 507 N.Y.S.2d 879 (2d Dep't, 1986) and Lane v. Elwood Estates, Inc., 298 N.Y.S.2d 751 (2d Dep't, 1969), the courts held that the purchasers were entitled to return of their down payments because lenders' revocations of mortgage commitment were caused by the change of financial circumstances of the purchasers, and the financial changes were out of controls of the purchasers. Both courts emphasized the good faith of the purchasers, and concluded that any default was not willful. The opinion in Lane, however, provoked a dissent suggesting that the court had ignored the risk allocation agreed upon by the parties, as shown from the time limits incorporated in the mortgage contingency clause.

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Tortious Interference Claim Reinstated

Normandy Real Estate Partners LLC v. 24 East 12^th Street Associates, LLC 2019 WL 123518 AppDiv, First Dept., 1/8/19 (memorandum opinion)

In failed purchaser's action for breach of a letter agreement and for tortious interference with contract, defendants seller and successful purchaser appealed from Supreme Court's dismissal of the complaint. The Appellate Division modified to reinstate the claims for breach of contract and tortious interference.

Tenant held a lease and an option to purchase on the subject premises. Tenant and failed purchaser signed a letter agreement to negotiate purchase of tenant's lease and purchase option. The letter agreement included the purchase price and some other terms, provided for a deposit by failed purchaser, and contemplated a further purchase and sale agreement. The letter agreement also included a confidentiality provision and a 14-day exclusivity period. The agreement provided, however, that during the exclusivity period, tenant could “continue discussions” with Tahari, the successful purchaser. In this action, failed purchaser contends that tenant breached the confidentiality provision by disclosing the agreement to Tahari, and breached the exclusivity provision by selling to Tahari during the 14-day period. The complaint also alleged that Tahari engaged in tortious interference with the letter agreement. Supreme Court dismissed the complaint, and failed purchaser appealed.

In modifying, the Appellate Division held that the complaint stated causes of action both for breach of the exclusivity provision and the confidentiality provision. The court held that because the agreement only authorized tenant to “continue discussions” with Tahari during the period, the terms of the agreement did not “utterly refute” the claim for breach of the exclusivity provision. The court then held that the complaint alleged sufficient damages from the alleged breach of the confidentiality agreement, including expenses incurred in performing due diligence and drafting a worthless escrow agreement. Finally, the court held that the complaint made out a tortious interference claim by alleging that Tahari intentionally and improperly induced tenant to breach the letter agreement, and concluded that Tahari had failed to make out an economic interest defense to the tortious interference claim. The court held, however, that Supreme Court had properly dismissed failed purchaser's action for an equitable lien because failed purchaser can adequately be compensated by money damages.

Comment

Generally, a third party who persuades another to breach an already existing contract through the offer of better terms will be liable for tortious interference. While the rule has not previously been applied in the context of real property, Gold Medal Farms, Inc. v. Rutland Cty. Cty.-Operative Creamery, Inc., 9 A.D. 2d 473, illustrates the general principle. The court held a milk distributor liable for tortious interference when, with awareness of a supplier's existing contract to sell all of its milk to a competitor, the distributor offered the supplier a higher price for its milk, leading the supplier to breach its original contract.

However, where a third party (or competitor) communicates an offer through a general advertising scheme targeting a broad audience, courts will not find tortious interference. Rather, competitors are free to solicit business from potential customers that they know are engaged in pre-existing contracts, so long as they don't specifically tailor their offers to induce breach of a particular contract. Thus, in V. Marangi Carting Corp. v. Judex Enterprises, Inc., 171 Misc. 2d 820, 655 N.Y.S.2d 832 (Sup. Ct. 1997), the court dismissed a tortious interference claim where the third party's advertising fliers, offering prices lower than the original contract, induced a breach of that contract. The court acknowledged that the competitor was aware of original contract, but citing to the Second Restatement of Torts §766, contrasted this sanctioned behavior with an example of conduct that would amount to an impermissible procurement of breach: “A writes to B: 'I know you are under contract to buy these goods from C. Therefore I offer you a special price way below my cost. If you accept this offer, you can break your contract with C, pay him something in settlement and still make money. I am confident that you will find it more satisfactory to deal with me than with C.' As a result of this letter, B breaks his contract with C. A has induced the breach.” See, id. at 834.

Although courts have recognized an “economic interest defense” when creditors or trustees procure a breach in an attempt to protect their assets, the defense is inapplicable when the alleged tortious interference arises from a third party's offer of better terms. The defense is available when a creditor induces breach of an existing contract by withholding funds owed to the creditor. For instance, in Ultramar Energy, Ltd. v. Chase Manhattan Bank, N.A., 179 A.D.2d 592, the court dismissed a tortious interference claim against a bank that retained funds in order to protect a pre-existing security interest. Purchaser had contracted to buy oil from a company with outstanding debt. Purchaser sent the funds through the oil supplier's bank, which also owned the supplier's debt. Sensing its debtor was in financial straits, the creditor bank attempted to recover its security interest by retaining rather than remitting those funds. Although the bank's actions prevented the debtor company from fulfilling its contractual obligation to provide oil, the bank was not liable for tortious interference, because it was acting to protect its pre-existing security interest. See, id at 593.

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Easement Scope

Tarsel v. Trombino 2018 WL6713707 AppDiv, Fourth Dept., 12/21/18 (memorandum opinion)

In an action by dominant estate owners seeking damages in connection with servient owner's interference with paving of the easement, both parties appealed from Supreme Court's declaration that dominant owners were entitled to repair and improve the easement, and from that court's grant of partial summary judgment to servient owners. The Appellate Division reversed, holding that dominant owners were not entitled to the declaration, and that the servient owners were not entitled to summary judgment.

The parties are neighbors. Dominant owners have an easement over a private access road that leads from a public road to their driveway. Deterioration of the access road has led to a significant grade difference between the access road and dominant owners' driveway. As a result, dominant owners' vehicles sometimes hit bottom when they enter the driveway. Dominant owners consulted with servient owner about paving the driveway, but servient owner expressed concern that paving the driveway would cause water to pool on the servient estate. Dominant owners then went ahead and paved the driveway anyway, and servient owners had the asphalt removed the day after it was installed. Dominant owners then brought this action seeking $1,300 in money damages, punitive damages, and a permanent injunction against interfering with future maintenance of the easement. Supreme Court declared that dominant owners were entitled to improve the easement as much as necessary to prevent scraping of ordinary vehicles, and only so long as the improvements did not create pooling on the easement. The court otherwise dismissed the complaint. Both parties appealed.

In reversing, the Appellate Division concluded that the declaration issues by Supreme Court had a number of flaws. In particular, the court noted that servient owner's complaint was not about flooding of the easement, but about flooding of surrounding land. In addition, the court noted that it was not clear what constituted an “ordinary” vehicle. On the other hand, the court held that a grant of summary judgment to servient owners was inappropriate because it was unclear whether the paved driveway would have imposed a burden on the servient land.

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Mortgage Acceleration

Caliguri v. Pentagon Federal Credit Union NYLJ 1/18/19, p. 25, col. 3 AppDiv, Second Dept. (memorandum opinion)

In an action to cancel and discharge a mortgage, mortgagor appealed from Supreme Court's denial of mortgagor's motion to enter a default judgment against mortgagee. The Appellate Division affirmed, holding that mortgagor had not established that mortgagee had accelerated the mortgage.

Mortgagor brought this action to cancel the mortgage, alleging that mortgagee had accelerated the mortgage more than six years earlier, causing the statute of limitations to run on the entire mortgage. Mortgagee did not appear, and mortgagor sought a default judgment. Although mortgagee did not oppose the motion, Supreme Court denied the motion for lack of proof. Mortgagor appealed.

In affirming, the Appellate Division noted that mortgagor had submitted the summons from an action commenced by mortgagee on April 22, 2009, but the summons did not identify the action as a foreclosure action and did not expressly allege an election to accelerate the mortgage. The court also noted that mortgage filed a bankruptcy petition in July 2009, which tolled the statute of limitations until mortgagee obtained relief from the automatic stay three months later.