Real Property Law

In affirming, the Appellate Division concluded that the March 2009 default letter was merely a letter discussing acceleration at some future time, and the debt was not accelerated until mortgagee filed the foreclosure action on May 10, 2010. As a result, the foreclosure action was not time-barred.

Bank of New York Mellon v. Maldonado NYLJ 3/29/19, p. 33, col. 6 AppDiv, Second Dept. (memorandum opinion)

In an action to foreclose a mortgage, mortgagor appealed from Supreme Court's denial of his motion to dismiss the complaint. The Appellate Division affirmed, rejecting the claim that the action was time-barred.

In 2006, mortgagor executed a promissory note for $404,000, secured by residential property. Mortgagor defaulted in November 2007. On Dec. 24, 2007, mortgagee sent mortgagor a letter notifying mortgagor that “[i]f the default is not cured on or before January 28, 2008, the mortgage payments will be accelerated with the full amount remaining accelerated and becoming due and payable in full, and foreclosure proceedings will be initiated at that time.” On April 13, 2015, mortgagee brought this foreclosure action, and mortgagor moved to dismiss the action as time-barred. Supreme Court denied the motion and mortgagee appealed.

In affirming, the Appellate Division concluded, as in U.S. Bank, supra, that mortgagee's letter did not accelerate the mortgage debt, but was merely an expression of future intent.

Comment

The First Department, but not the Second Department, holds that when a mortgagee sends a letter indicating that a defaulted mortgage will be accelerated at a particular future date, the statute of limitations on the entire mortgage debt runs from the specified date. In Deutsche Bank Nat'l Tr. Co. v. Royal Blue Realty Holdings, Inc., 148 A.D.3d 529, the First Department dismissed plaintiff lender's action as untimely, holding lender's letter to debtor had effectuated acceleration by stating that mortgagee “will” accelerate the loan balance and proceed with a foreclosure sale unless the borrower cured his defaults within 30 days. The court concluded that the letter evinced clear and unequivocal intent to accelerate 30 days after the date of the letter. By contrast, the Second Department in Milone v US Bank Natl. Assn., 164 A.D.3d 145, explicitly rejected the First Department's ruling in Deutsche Bank, holding that that mortgagee's letter to mortgagor, which stated that mortgagor's failure to cure her delinquency within 30 days “will result in the acceleration” of the note, was merely an expression of future intent but fell short of an actual acceleration. In doing so, the court reasoned that an expression of future intent is subject to change, and, therefore, lacks the clear and unequivocal intent necessary to achieve acceleration.

Where a letter announces a general warning that certain behavior will result in acceleration but fails to specify the date on which acceleration is to take place, there universal agreement that acceleration is not effective. Accordingly, in Pidwell v. Duvall, 28 A.D.3d 829, the Third Department held that the statute of limitations had not run and plaintiff mortgagee's foreclosure proceedings were timely, despite the mortgagee sending a letter to mortgagor (more than six years prior to the foreclosure proceeding) purporting to accelerate, because the letter's general caution — that failure to make certain payments in the future would result in the entire balance being due — did not commence running of the statute of limitations.

Even if the mortgagee provides no notice of acceleration, institution of foreclosure proceedings sufficiently constitutes acceleration and triggers the statute of limitations. Accordingly, in Clayton Nat'l, Inc. v. Guldi, 307 A.D.2d 982, the court dismissed plaintiff's foreclosure action as time barred, since more than six years earlier the mortgage had been accelerated by filing a summons and complaint of a previous foreclosure proceeding on the subject property. In support of its holding, Clayton Nat'l cites Albertina Realty Co. v Rosbro Realty Corp., 258 NY 472, the seminal mortgage acceleration case, in which the Court of Appeals held that mortgagee had properly accelerated the mortgage by filing a foreclosure action, and could refuse borrower's payments of past due balances and require payment of the fully accelerated amount, even though borrower had tendered payment prior to receiving the service of summons and complaint.

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Mortgage on Church Property Not Properly Authorized

John T. Walsh Enterprises LLC v. Grace Christian Church NYLJ 3/26/19, p. 21, col. 1 Supreme Ct. Kings Cty. (Partnow, J.)

In an action to foreclose a mortgage encumbering church property, the church moved for a judgment dismissing the complaint. The court granted the motion, holding that the mortgage had not been properly authorized.

On Nov. 13, 2007, the church executed a mortgage to secure a note for $350,000. The note was to be repaid by Nov. 13, 2008. The church deposited $56,000 of the proceeds to cover interest for the first year, and the agreement required the church to pay an additional $7,000 if it wanted to extend the maturity date of the loan. When the church defaulted on payment of principal, mortgagee brought this foreclosure action, and the church moved to dismiss, asserting both that the mortgage was invalid because the Attorney General had not approved it, and that the mortgage loan was usurious.

In granting the church's motion, the court conceded that Religious Corporations Law section 12(9) authorizes a court to approve a mortgage by a religious corporation if the mortgagee establishes that the terms of the mortgage are fair, and the mortgage will promote the religious corporation's purposes. The court concluded, however, that mortgagee had not met that standard, noting first that the congregation had not approved the mortgage loan and second that foreclosure of the loan would deprive the congregation of a place to worship. The court also noted irregularities in the loan, including a last-minute increase in the stated amount of the loan without proper authorization of the amendment to the corporate resolution approving the loan. In dismissing the foreclosure action, however, the court indicate4 that the church remained liable to the mortgagee on the underlying mortgage note.

Comment

When a court invalidates a mortgage executed by a religious organization, the underlying debt “remains unaffected and is enforceable.” In Bernstein v. Friedlander, 58 Misc. 2d 492, 495, the court granted the plaintiff creditor's motion for summary judgment to recover the balance on bonds executed by a synagogue. The bonds were secured by a mortgage that had not been properly ratified by the attorney general or a court, and the court held that although the mortgage was invalid, the underlying bond was not. The plaintiff had sued under a theory of contract liability, and the court held that there was no requirement for the court's approval for a religious corporation's borrowing, and that “a religious corporation is liable on its contracts the same as any other corporation.” Id. at 495.

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Sale Contract Precludes Fraud Claim

438 West 20 Street, LLC v. Bares NYLJ 4/1/19, p. 17, col. 1 Supreme Ct., N.Y. Cty. (Sherwood, J.)

In townhouse purchaser's action against sellers for fraud, sellers moved for summary judgment. The court granted sellers' motion, holding that the sale contract itself precluded purchaser's fraud claims.

After sellers converted a 150-year old townhouse for an apartment building into a single family home, they listed the home for sale. They then contracted to sell the home to purchaser. The contract provided that the home was sold in “as is” condition, that purchaser had conducted an inspection and was entering into the contract based only on that inspection, that sellers made no representations, and that none of seller's covenants, representations, or warranties would survive closing. A rider provided that purchaser has been providing access to conduct whatever inspections purchaser deems necessary. Purchasers did, in fact, conduct an inspection, and negotiated a $150,000 price reduction as a result of defects discovered during the inspection. Purchaser closed on the purchaser, and subsequently discovered many other structural defects that he alleges were actively concealed by sellers. As a result of that alleged concealment, purchaser brought this fraud claim. Sellers moved for summary judgment.

In granting sellers' motion, the court relied on the purchaser's representation in the contract that purchaser had examined the premises and was familiar with its condition, and that neither the seller nor the seller's agents had made any representations to purchaser. The court emphasized that purchaser had not put forth any evidence indicating that sellers refused more invasive inspection of the premises. Finally, the court noted that purchasers could not demonstrate any reasonable reliance on representations made by seller (if any were made) because purchaser's own inspection report revealed seventeen defects, including evidence of mold, and warned that “it is not unusual for new purchasers to assume the risk of unknown, hidden defects in old buildings ….” Finally, the court concluded that purchaser had submitted no credible evidence that sellers had actively concealed non-visible defects.

Comment

A merger clause that provides that buyer agrees to purchase the property as is, that includes specific language disclaiming reliance on seller's representations of property conditions and that provides that buyer is relying on its own judgment or inspections will generally foreclose buyer's post-closing fraud claims. For instance, in McPherson v. Husbands, 54 A.D.3d 908, the Second Department dismissed the buyers' post-closing fraud claims since the language of the merger clauses was sufficiently specific to disclaim the reliance on the sellers' written and oral representations as to the physical conditions of the buildings. In McPherson, the attached rider to the contract specifically declared that the buyer “had inspected the premises, agreed to accept it 'as is', and understood that no representations were made as to its condition”, and thus, the fraudulent inducement claim was “extinguished” upon closing. Similarly, in Dolansky v. Frisello, 92 A.D.3d 1286, the Fourth Department dismissed a fraud claim when the specific disclaimer provided that the buyer conducted inspections and accepted the conditions “as is”, and “there are no other promises, warranties, representations and statements other than contained.”

If, however, the fraud claim is based on a defect peculiarly within seller's knowledge and not detectable by a due diligence inspection, the First Department has applied the “special facts” doctrine to deny seller's motion to dismiss, even though the contract included a specific disclaimer and an “as is” clause. In TIAA Global Investments, LLC v. One Astoria Square LLC, 127 A.D.3d 75, the court declined to dismiss buyer's fraud claim because the status of air infiltration into the building was peculiarly within the seller's knowledge and because questions of fact remained about whether it would have been practical for the buyer to do the potentially destructive testing necessary to detect the alleged defect.

By contrast, a general merger clause does not bar a buyer's fraud claim. Thus, in Lieberman v. Greens at Half Hollow, 54 A.D.3d 908 (2d Dep't 2008), the court denied summary judgment dismissing the buyer's fraudulent inducement claim brought after the closing of the condominium purchase and held that the contract's general merger clause did not preclude the fraud claim.

To prevail on a fraud claim, however, the buyer must establish that any reliance on seller's representations was reasonable If the buyers had the opportunity to conduct due diligence inspections before closing but chose not to, the buyers' reliance on the alleged misrepresentation may be unreasonable, and might therefore bar any post-closing fraud claims. For instance, in Drummond Decatur & State Props., LLC v 10500 Drummond Rd. Partners LP, 2017 N.Y. Misc. LEXIS 1359, the court dismissed a claim that seller had fraudulently represented that the roof had been repaired because the buyers had the opportunity to inspect the roof conditions but nevertheless purchased the premises without performing a due diligence inspection.

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Seller's Representations Did Not Survive Closing

116 Waverly Place LLC v. Spruce 116 Waverly LLC NYLJ 3/21/19, p. 21, col. 6 Supreme Ct., N.Y. Cty. (Engeron, J.)

In townhouse purchaser's action for breach of contract and fraud, seller moved for summary judgment. The court granted seller's motion, holding that, in light of the language of the contract, none of seller's representations survived closing.

Sellers owned the subject townhouse and had contractors gut-renovate the building. They then contracted to sell the building to purchasers for $20 million. A rider to the sale contract required sellers to perform additional work before closing, and provided that completion of that work was a condition of purchaser's obligation to close. The contract also provided that purchaser had inspected the premises and was accepting the premises as is, subject to the requirements imposed on the sellers by the rider. Finally, a rider to the contract provided that sellers were making no representations or warranties with respect to the condition of the premises, other than those appearing in the sale contract. The parties closed on the sale contract, and purchaser then discovered roof leaks and other alleged defects in the premises, prompting purchaser to bring this action alleging breach of contract, breach of the implied covenant of good faith and fair dealing, violation of General Business Law provision, and fraud. Sellers moved for summary judgment.

In granting sellers' motion, the court concluded that the “as is” and “no representations” clauses in the sale contract precluded purchasers from recovering on a breach of contract claim. If there were any defects in the work performed by sellers, purchaser's remedy under the contract was not to close. The court dismissed the claim for breach of the covenant of good faith and fair dealing because that claim was subsumed by the breach of contract claim. The court then held that the General Business Law provisions cited by purchasers were designed to protect consumer purchasers, not purchasers of $20 million dollar town homes. Finally, the court turned to the fraud claim and held that purchaser had not demonstrated any evidence of affirmative misrepresentation or active concealment by sellers, thus defeating any fraud claim. The court emphasized that parties ought to be able to draft a sale contract that forecloses any post-sale fraud claims, and concluded that this contract's “as is” and “no representation” clauses were successful efforts to draft just such a contract.

*****

Foreclosure Action Time Barred

Bank of New York Mellon v. Dieudonne NYLJ 3/20/19, p. 21, col. 1 AppDiv, Second Dept. (Opinion by Miller, J.)

In an action to foreclose a mortgage, mortgagee bank appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, holding that the foreclosure action was time-barred because mortgagee bank had accelerated the mortgage debt more than six years before mortgagee brought the foreclosure action.

Mortgagee initially brought a foreclosure action against mortgagor in June 2010, but then did not bring the instant foreclosure action until more than six years later, in October 2016. Mortgagor moved to dismiss the action on the ground that the statute of limitations barred the action. Mortgagee, however, contended that the initial foreclosure action did not validly accelerate mortgagor's debt because a reinstatement provision gave the borrower the option to de-accelerate the mortgage when certain conditions are met. Mortgagee argued that because of the reinstatement provision, the statute of limitations did not start to run until mortgagor's right to de-accelerate was extinguished in accordance with the mortgage's terms. Supreme Court rejected the argument, and mortgagee appealed.

In affirming, the Appellate Division noted that the language of the mortgage made it clear that mortgagee was entitled to exercise its option to accelerate if specified conditions were met. The reinstatement provision was not listed among those specified conditions. As a result, the court concluded that the acceleration itself was valid, and triggered the start of the limitations period.

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Mortgagor Fails to Establish Forgery

Sacks v. Deutsche Bank Nat'l Trust Co. NYLJ 4/18/19, p.21, col. 1 U.S. Dist Ct., EDNY (Vitiliano, J.)

In mortgagor's action to quiet title to property, mortgagor sought a declaration that a note and mortgage on the property were invalid, and that mortgagees had no claim to the property. The court awarded judgment to mortgagees, holding that mortgagor had failed to establish that her signature on a power of attorney was a forgery.

Mortgagor bought the subject property in 1998. Eight years later, her son executed a promissory note in the amount of $805,000, together with a mortgage on the property, purporting to act as her mother's attorney in fact. At the closing, the son presented his driver's license and a power of attorney (POA) dated four days earlier. The POA named mortgagor as the principal, and authorized the son to execute a promissory note and mortgage encumbering the subject property. The POA bore the stamp and signature of a notary, and the signature of two witnesses. Although the mortgage payments were made for two and a half years, the mortgage fell into default in 2009. Mortgagees sent notices of default to mortgagor, but mortgagor did not make the monthly payments. In this quiet title action, mortgagor contended that her signature on the POA was forged (but not by her son), and that the note and mortgage were therefore invalid.

In awarding judgment to mortgagees, the court emphasized the presumption of regularity that results from a notarized instrument. The court noted that mortgagor's assertion that her signature was forged was not sufficient to overcome that presumption. Although mortgagor presented a former Secret Service agent who testified that the notary's stamp had been stolen, the testimony was hearsay and failed to establish that the allegedly stolen stamp was used on the POA. The court relied heavily on mortgagor's failure to call the notary or either of the two witnesses to establish that the signature was not hers. The court drew the inference that they were not called because their testimony would not have been helpful to the mortgagor. As a result, the court awarded judgment to mortgagees.

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Mortgagee May Bring Action on Promissory Note; Not Limited to Foreclosure Remedy

Kodsi v. Scotto 170 A.D.3d 1357 AppDiv, Third Dept. 3/14/19 (Opinion by Aarons, J.).

In an action to recover the amount due on a mortgage note, mortgagors appealed from Supreme Court's grant of summary judgment to mortgagee. The Appellate Division affirmed, holding that mortgagee was entitled to bring an action for breach of the promissory note and was not limited to a foreclosure action.

Mortgagors purchased two parcels in 2006 and executed a $920,000 note secured by a mortgage on the property. The mortgage was subsequently assigned to current mortgagee. Subsequently, mortgagors executed a new promissory note in mortgagee's favor, together with a consolidation, extension and modification agreement reflecting a debt of $934,710.61. Mortgagors subsequently defaulted on property tax payments, and in April 2017, the property was sold in a tax foreclosure sale. Mortgagees then brought this action on the promissory note by moving for summary judgment in lieu of complaint. Supreme Court granted the motion and mortgagors appealed.

In affirming, the Appellate Division first concluded that mortgagee had properly brought the action by motion for summary judgment, and satisfied his burden by submitting the note and evidence of default. The court then held that mortgagors had raised no triable questions of fact. The court rejected mortgagors' claim that they were entitled to an appraisal of the property so that a setoff could be computed, noting that an appraisal would have been meaningless because, as a result of the tax foreclosure sale, mortgagors no longer had marketable title to the property. Finally, the court rejected mortgagors' claim that mortgagee's remedy was limited to an equitable remedy of foreclosure, holding that the holder of the note and mortgage has a choice between an action at law on the note or a proceeding in equity to foreclose on the mortgage.

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Summary Judgment Denied In Action to Set Aside a Deed for Fraud

Reece v. SHC Equities, LLC NYLJ 4/5/19, p. 29, col. 1 AppDiv, Second Dept. (memorandum opinion)

In an action to set aside a deed, to impose a constructive trust, and to recover damages for fraud, transferee appealed from Supreme Court's denial of its summary judgment motion. The Appellate Division affirmed, holding that the transferee had failed to demonstrate its prima facie entitlement to judgment as a matter of law.

Transferors owned property secured by mortgages. After they defaulted, transferee, a short sale broker, allegedly notified them that the value of the premises was less than the remaining balance of the mortgages, and that their only option was to pursue a short sale. Transferors allege that transferee promised to effectuate a short sale and presented them with documents to effectuate the short sale. One of the documents presented to transferors was a quitclaim deed, which they signed. Transferors now contend that transferee never made any effort to effectuate a short sale, and that the mortgage loans were never satisfied. They brought this action seeking to impose a constructive trust on the property, to set aside the deed, and to recover damages for fraud. Supreme Court denied transferee's summary judgment motion, and transferee appealed.

In affirming, the Appellate Division noted that transferee had submitted an alleged contract, executed 11 months before the deed, by the terms of which transferors agreed to transfer the property to transferee for $11,000. Transferee also submitted an $11,000 check. The court concluded that these items were insufficient to rebut the allegations that transferors, relying on the fiduciary broker-principal relationship, executed all of the documents presented to them in reliance on the transferee's promise to arrange a short sale. The court also held that the documents did not rebut the fraud claim because the contract failed to establish that transferee did not misrepresent that the contract would be used to effectuate a short sale.