Real Property Law

In affirming, the Appellate Division noted that the notice of pendency put 89 Ridge Road on constructive notice of the foreclosure action. As a result, 89 Ridge Road could not be a bona fide purchaser, and its interest was effectively foreclosed upon entry of the judgment of foreclosure. As a result, intervention was not warranted.

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Recording of Senior Mortgage Put Junior Mortgagee on Constructive Notice

JPMorgan Chase Bank, N.A. v. Klein NYLJ 12/13/19, p. 31, col. 1 AppDiv, Second Dept. (memorandum opinion)

In an action to foreclose a senior mortgage, junior mortgagee appealed from Supreme court's dismissal of its counterclaim, declaration that the senior mortgage enjoyed priority, and declaration that the junior mortgage was invalid. The Appellate Division modified to delete the declaration that the junior mortgage was invalid, but otherwise affirmed, holding that recording of the senior mortgage placed junior mortgagee on constructive notice of its existence.

JJT Properties owned the property when it was merged into Biltmore Properties in 2002. A certificate of merger was filed with the Department of State on May 7, 2002, and was recorded in the Rockland county Clerk's office on June 7, 2002. The following year, the Kleins, the sole directors, officers, and shareholders of Biltmore, executed a mortgage on behalf of Biltmore as security for a $263,250. That mortgage was recorded in 2003, and was subsequently assigned to senior mortgagee in 2015. Meanwhile, in 2005, JJT Properties purported to convey the property to Charley Holdings, which, in turn conveyed the property to Wolanski. Wolanski obtained a loan from junior mortgagee, secured by a mortgage on the property. All of these deeds and mortgages were promptly recorded. Junior mortgagee and senior mortgagee brought separate actions to foreclose their separate mortgages. Junior mortgagee obtained a judgment of foreclosure, but senior mortgagee was not a party to that action and was denied leave to intervene. Then, in the instant foreclosure action brought by senior mortgagee, junior mortgagee asserted a counterclaim contending that the senior mortgage was subordinate to its own because recording of the senior mortgagee's interest was insufficient to place junior mortgagee on constructive notice. Supreme Court disagreed, declared that the senior mortgage enjoyed priority, and declared the junior mortgage invalid. Junior mortgagee appealed.

In modifying, the Appellate Division agreed with Supreme Court that senior mortgagee's interest was properly recorded two years before junior mortgagee's mortgage, putting junior mortgagee on constructive notice of the senior mortgage. But the Appellate Division also held that Supreme Court had improperly declared, sua sponte, that the junior mortgage was invalid. The court noted that the sua sponte determination was dramatically unlike the relief senior mortgage had sought on its motion.

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Issues of Fact Preclude Summary Judgment on Easement Claims

10 Bethpage Road, LLC v. 114 Woodbury Realty, LLC NYLJ 12/13/19, p. 29, col. 3 and p. 30, col. 4 (memorandum opinions)

In two separate actions, neighboring owners appealed and cross-appealed from Supreme Court's denial of their summary judgment motions. In both cases, the Appellate Division modified, but affirmed the denial of summary judgment in most respects.

Two brothers, Ralph and Saverio, jointly owned a parcel of land on which they operated a family business. In 1999, they subdivided the parcel in a way the left Ralph's lots without direct access to a roadway. The brothers executed a declaration of easement giving Ralph access over Saverio's lots, and the easement was recorded on Oct. 25, 1999. Subsequently, the brothers transferred their lots to separate corporations controlled by their respective families. Saverio's family ran the business and rented Ralph's lots for use in connection with the business. Dispute arose when, in 2012, Saverio's sons could not reach an agreement for a new lease of the land owned by Ralph's sons' corporation. Saverio's son then erected a spite wall blocking access from Ralph's parcels to the wall, prompting this litigation. Saverio's sons' corporation contended that the easement was void, while Ralph's sons' corporation sought declaratory and injunctive relief recognizing and enforcing the easement. Supreme Court held that questions of fact precluded summary judgment.

The Appellate Division agreed that triable issues of fact precluded summary judgment. In particular, Saverio's corporation submitted evidence that no fewer than 11 iterations of the easement were in existence, some of which had been filed in the county clerk's office, some without signature pages. The court also pointed to issues of fact about whether Saverio was physically able to sign the easement, and whether the easement might have been contingent.

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Purchaser's Claim for Damages Against Dual Agent Broker Survives Summary Judgment

Munna v. Axman NYLJ 12/19/19, p. 23, col. 1 AppDiv, First Dept. (memorandum opinion)

In an action by apartment purchaser against real estate broker for breach of fiduciary duty, broker appealed from Supreme Court's denial of broker's summary judgment motion. The Appellate Division affirmed, holding that purchaser had provided sufficient proof of damages to avoid summary judgment.

Purchaser contended, in an affidavit and in deposition testimony, that broker failed to disclose that she represented both purchaser and seller of the apartment. Broker contended that she told purchaser that she was representing the seller, but admitted that she did not make the required statutory disclosure about the effects of dual representation — in particular, that by consenting to dual agency the parties were giving up their right to undivided loyalty. Purchaser sought damages for breach of fiduciary duty.

In affirming Supreme Court's denial of broker's summary judgment motion, the Appellate Division held that purchaser had provided sufficient proof of damages by submitting her bank appraisal, which included six comparable apartments, five of them located in the subject apartment building.

COMMENT

Although no court has awarded a party damages against a dual-agent broker for failure to provide the party with the statutory disclosure form, a broker who fails to disclose dual agency will likely be forced to forfeit her commission. In P. Zaccaro, Co., Inc. v DHA Capital, LLC, the First Department found that the real estate broker had "engaged in an impermissible dual agency without full disclosure" and therefore forfeited its right to a commission, even though neither buyer nor seller were actually injured by Zaccaro's dual agency. 157 A.D.3d 602.

When a broker engages in dual representation without disclosing that representation to both principals, a principal unaware of the dual representation may avoid the agreement even in the absence of a showing of fraud. In Carr v. Nat'l Bank & Loan Co, 167 N.Y. 375, the Court of Appeals held that a purchaser of bonds was entitled to rescission of the purchase when she discovered that the bank officer supposedly acting on her behalf was also acting on behalf of the bank, the seller of the bonds. Not only had the officer failed to disclose the dual agency, but he had also misrepresented the quality of the bonds.

A principal injured by a broker acting as a dual agent may seek redress through the Department of State, which has power to suspend a broker's license until the broker makes restitution. Pursuant to RPL §441-C, the Department of State has authority to fine or reprimand real estate brokers for violations of Art. 12-A (regulation of RE brokers), including violations of §443(3)(b) (failing to obtain a signed dual-agency disclosure form from buyer). In Goldstein v. Department of State, Div. of Licensing Services, 144 A.D.2d 463, the Second Department affirmed a determination by the Secretary of State to impose a suspension of a real estate broker's license until the broker made "restitution of unearned fees and secret profits" after broker had acted as a dual agent in a transaction.

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Title Insurance Regulations Upheld

In re New York Land Title Association v. New York State Department of Financial Services NYLJ 12/30/19, p. 20, col. 5 AppDiv, First Dept. (memorandum opinion)

In an article 78 proceeding to annul regulation of title insurance companies, the Department of Financial Services appealed from Supreme Court's grant of the petition. The Appellate Division reversed, denied the petition, and dismissed the proceeding, holding that the regulations were not unconstitutionally vague.

In a prior stage of this litigation challenging a prohibition of valuable inducements by title insurers to obtain new business, the Appellate Division held that two provisions were invalid, but otherwise rejected arguments that the regulations were ambiguous and inconsistent with the applicable statute. The court remanded to Supreme Court for consideration of title insurers' due process and free speech challenges to the regulations. On remand, Supreme Court held that the regulations violated free speech and due process rights, prompting this appeal by the Department of Financial Services.

In reversing, the Appellate Division rejected the argument that the regulations were unconstitutionally vague because they qualified a list of permissible activities by providing that the activities must be "reasonable and customary, and not lavish or excessive." The court concluded that those words provided adequate notice of the type of behavior that is proscribed. Turning to the free speech challenge, the court emphasized that when speech and non-speech elements are combined in the same course of conduct, the non-speech elements can justify limitations on speech so long as the restriction on speech is no greater than is essential to accomplish the government purpose. The court also emphasized that commercial speech is entitled to less protection than non-commercial speech, and went on to hold that the governmental interest in preventing consumers from subsidizing exchanges of valuable things for real estate professionals was sufficient to justify the speech restrictions in the regulations, which did generally permit title insurers to advertise and make political and charitable contributions.