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Real Property Law
Foreclosure Sale Bidder Entitled to Return of Down Payment When Title Was Not Marketable
Perelmuter v. LRM Builders, LLC
2024 WL 3129332
AppDiv, Second Dept.
(memorandum opinion)
In an action to foreclose a mortgage, successful bidder at the foreclosure sale appealed from Supreme Court’s order directing the referee to release a down payment to mortgagee. The Appellate Division reversed and directed the referee to return the down payment to the bidder, holding that the bidder was entitled to marketable title.
Mortgagee brought the foreclosure action in June 2006. A judgment of foreclosures and sale dated April 8, 2019 directed the referee to conduct a sale, which the referee held on Oct. 3, 2019. The successful bidder tendered a $94.100 down payment to the referee and agreed to be bound by the terms of the sale, which provided for a closing 30 days from the date of the foreclosure sale. On October 31, bidder’s lawyer called mortgagee’s lawyer to indicate that it had not received a title report and that bidder would be unable to close by the law date. On November 8, mortgagee’s lawyer informed bidder’s lawyer that its failure to appear on the November 4th closing date resulted in forfeiture of the down payment. Bidder’s lawyer responded with an updated title report noting additional exceptions to title that had been added to the report. Bidder’s lawyer concluded that in light of the exceptions, RPAPL 1351(1) was not complied with and the referee was not in a position to deliver marketable title on the law day. Mortgagee then moved to direct the referee to release the down payment, and Supreme Court granted mortgagee’s motion.
In reversing, the Appellate Division noted that for a seller to retain a down payment for purchaser’s breach, seller must establish that it was ready, willing and able to perform on the closing date. The court then held that a purchaser at a foreclosure sale is entitled to good marketable title, and noted that successful bidder had submitted an affidavit indicating that the exceptions in its title report, if not cured, would prevent issuance of a standard owner’s title policy and would render title unmarketable. Because mortgagee did not raise a triable issue of fact in response, successful bidder was entitled to return of its down payment.
Comment
A successful bidder at a foreclosure sale can set aside the sale and obtain return of the down payment when the seller cannot deliver marketable title. In Golden Bridge, LLC v. Rutland Dev. Grp., Inc., 218 A.D.3d 658, the Second Department reversed the lower court’s order denying bidder’s motion to vacate the sale and return the down payment, holding that a pending quiet title action made the title unmarketable. Three weeks after the foreclosure sale, in a separate proceeding, a third party had commenced a quiet title action alleging a forged deed concerning one of the lots sold. In Bd. of Managers of 442 St. Marks Ave. Condo. v. Milord, 212 A.D.3d 760, the court vacated a foreclosure sale and ordered the return of the down payment because a previously undisclosed senior mortgage, held by a non-party to the foreclosure action, encumbered the property making title unmarketable. Similarly, in NYCTL 1998-1 Tr. v. Mayfield, 17 Misc. 3d 268, the court set aside a foreclosure sale and directed the seller to return the down payment after the assignee of the successful bidder discovered that the original conveyance to the foreclosure-defendant reserved a possibility of reverter in the grantor, thus making title unmarketable.
Conversely, if a successful bidder had actual notice of a title defect the bidder cannot obtain return of the down payment. In Aaron v. Kent, 182 A.D.2d 960, the Third Department held that a successful bidder could not obtain return of his down payment, despite an unmarketable title, because the referee provided actual notice of the title defect to the bidder. At the foreclosure sale, in response to the bidder’s assertion that the Referee could not convey marketable title due to unpaid taxes, the Referee announced that the sale was subject to unpaid taxes and the redemption period had not expired. Additionally, the memorandum of sale specifically provided that the parcel was purchased subject to “unpaid taxes [and] assessments”.
Courts will vacate a foreclosure sale when post-sale discoveries reveal encroachments or misrepresentations of the property’s lawful use. In Lane v. Chantilly Corp., 251 N.Y. 435, the court affirmed a decision to vacate the sale and relieve the purchaser of the down payment because a post-sale discovery revealed that certain stone piers and a portico extended on to public property. The court held that despite the premises being sold “subject to any state of facts which an accurate survey would show,” the lower court properly vacated the sale to avoid inequities. In Morrow v. Renniere Process, Inc., 222 A.D. 100, the court vacated a foreclosure sale where the physical appearance of the property misrepresented the property’s lawful use. Pre-sale inspection indicated that the premises had been converted from housing for four families to a tenement accommodating ten families, though the facts of the case are not clear whether it was actually used as a tenement or just appeared that way. However, lawfully the premises could not be occupied as tenement houses. Nevertheless, the court concluded that the physical appearance was “sufficient to constitute a representation that the property could be applied to the use for which it ostensibly was designed,” and it would be inequitable to compel the purchaser to complete the sale.
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Inadequacy of Price Does Not Establish Duty to Inquire About Fraud
Baldeo v. HSBC Bank USA
2024 WL 3434224
AppDiv, Second Dept.
(memorandum opinion)
In an action by prior lender to establish that his interest was superior to that of a subsequent mortgagee, subsequent mortgagee appealed from Supreme Court’s grant of summary judgment to prior lender. The Appellate Division reversed, holding that lender had not established that subsequent mortgagee was on inquiry notice of a prior fraud.
While Baldeo and Rambaran were fee owners of the subject, Rambaran executed an unsecured note in favor of Baldeo for $913,500. Rambaran defaulted on the note. The following year, in 2007, Rambaran conveyed his interest to his daughters for half of the market value of his interest, and the daughters executed a mortgage in favor of Delta. In 2013, Baldeo brought this action to establish that its note was superior to the Delta mortgage. Meanwhile, in 2015, Baldeo obtained a judgment against Rambaran on the note and in 2017, obtained a judgment that Rambaran’s conveyance to his daughters was fraudulent. Then, in 2019, Baldeo moved for summary judgment in this action to establish that its 2015 judgment on the note enjoyed superiority over the Delta mortgage (now held by HSBC). Supreme Court granted Baldeo’s summary judgment motion, and HSBC appealed.
In reversing, the Appellate Division emphasized that a mortgagee’s interest is protected unless it has notice of a prior fraud affecting the title of its grantor. The court held that the mere fact that Rambaran had conveyed the property to his daughters for half of the market value was insufficient to impose on Delta a duty to inquire whether fraud was taking place. As a result, the court held that the Baldeo was not entitled to summary judgment on its complaint.
Comment
Courts sometimes, but not always, hold that a mortgagee or purchaser who fails to investigate a deed supported by inadequate consideration is on inquiry notice of any title defects and does not qualify as a bona fide purchaser or encumbrancer. In 89 Pine Hollow Rd. Realty Corp. v Am. Tax Fund, 96 AD3d 995, the Second Department affirmed Supreme Court’s grant of summary judgment to a prior owner challenging deeds and mortgages emanating from a defective foreclosure sale, emphasizing that the mortgagee had lent money to an affiliate of a foreclosure sale purchaser who had acquired title from the purchaser for a fraction of the property’s appraised value. The foreclosure sale itself was defective for lack of proper notice, and the court held that the mortgagee’s knowledge that its assignor had purchased the property at significantly less than its appraised value, together with objections by the mortgagee’s title insurer, was enough to put the mortgagee on inquiry notice of the prior owner’s interest.
By contrast, in Miner v. Edwards, 221 A.D.2d 934, the Fourth Department affirmed a denial of a summary judgment motion by the County Department of Social Services in the county’s suit to invalidate a deed and subsequent mortgage given by purchaser and mortgagee who had acquired title from the prior owner’s daughters, who in turn acquired a deed from their mother who had been the recipient of public benefits. The county had challenged the deed to the daughters and the subsequent deeds as fraudulent conveyances, and the court agreed with respect to the daughters, but held that the purchaser and mortgagee qualified as bona fide purchaser status, noting that evidence of no consideration paid by the daughters to the mother was not sufficient to impose inquiry notice.
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