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 4^th 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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