New York Law Review

Tag: Equitable Lien

  • M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd., 12 N.Y.3d 798 (2009): Establishing an Equitable Lien on Property

    M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd., 12 N.Y.3d 798 (2009)

    An equitable lien requires an express or implied agreement clearly demonstrating the intent that specific property be held as security for an obligation; a mere expectation is insufficient.

    Summary

    M & B Joint Venture sought to establish an equitable lien on a property after loaning money to a holding company, EH. Realty. M & B claimed it was promised a second priority mortgage. However, documentation revealed the mortgage was intended for another entity, 21st Century Technologies, Inc. The New York Court of Appeals held that M & B failed to demonstrate a clear agreement that the property would serve as security for their loan. The Court reversed the Appellate Division’s order in part, dismissing M & B’s claim against Laurus Master Fund, the mortgagee, and 14-16 East 67th Street Holding Corp., the property owner, and canceling the notice of pendency.

    Facts

    Penthouse International secured a $24 million loan from Laurus Master Fund, using a mortgage on a New York City townhouse as collateral. Penthouse then transferred the property to EH. Realty Associates, LLC, a company Penthouse largely owned. M & B Joint Venture, Inc. (M & B) alleges it loaned $490,000 to EH. Realty, expecting a second-priority mortgage on the same property. M & B sent a letter instructing the escrow agent not to release the funds until it received a promissory note and the mortgage. The escrow agent allegedly released the funds without securing the mortgage for M & B. Penthouse defaulted on its loan, leading to foreclosure, and the property was conveyed to 14-16 East 67th Street Holding Corp., wholly owned by Laurus.

    Procedural History

    M & B Joint Venture sued Laurus and 14-16 East, claiming an equitable lien and filing a notice of pendency. The defendants moved to dismiss the equitable lien claim and cancel the notice of pendency. Supreme Court denied the motions. The Appellate Division modified the Supreme Court’s order by dismissing a claim for unjust enrichment, but otherwise affirmed the denial of the motion to dismiss the equitable lien claim. The Court of Appeals reversed the Appellate Division, granting the motion to dismiss the equitable lien claim and cancel the notice of pendency.

    Issue(s)

    Whether M & B Joint Venture presented sufficient evidence to establish an express or implied agreement demonstrating a clear intent that the property would be held as security for its loan, thereby justifying the imposition of an equitable lien.

    Holding

    No, because the evidence submitted by M & B itself indicated that any mortgage on the property was to be in favor of 21st Century Technologies, Inc., not M & B, and M & B provided no evidence of assignment or ownership interest in the alleged lien.

    Court’s Reasoning

    The Court of Appeals relied on the principle that an equitable lien requires an express or implied agreement demonstrating a sufficiently clear intent to hold property as security for an obligation. Citing Teichman v Community Hosp. of W. Suffolk, 87 NY2d 514, 520 (1996), the court emphasized that there must be an agreement “that there shall be a lien on specific property.” The court found M & B’s evidence contradicted its claim. The February 2004 letter, which M & B offered as proof, stated that any mortgage was to be in favor of 21st Century Technologies, Inc., not M & B. The Court noted that a party’s “mere expectation, however sincere, is insufficient to establish an equitable lien” (Scivoletti v Marsala, 61 NY2d 806, 809 (1984)). Because M & B’s own submissions proved it lacked a cause of action, the Court dismissed the complaint. The court referenced Rovello v Orofino Realty Co., 40 NY2d 633, 636 (1976) and Leon v Martinez, 84 NY2d 83, 88 (1994), underscoring that dismissal is appropriate when the plaintiff’s evidence conclusively negates their claim.

  • Rosario-Paolo, Inc. v. C & M Pizza Restaurant, Inc., 82 N.Y.2d 120 (1993): Insurer Liability When Ignoring Notice of Equitable Lien

    Rosario-Paolo, Inc. v. C & M Pizza Restaurant, Inc., 82 N.Y.2d 120 (1993)

    An insurer who pays a claim to the insured after receiving notice of a third party’s equitable lien on the insurance proceeds does so at its peril and may be liable to the lienholder.

    Summary

    Rosario-Paolo, Inc. (plaintiff) sold a pizza restaurant to C & M Pizza Restaurant, Inc. (C&M), taking a security interest in the property. The security agreement required C&M to maintain fire insurance naming Rosario-Paolo as a beneficiary. C&M obtained a policy from Investors Insurance Company of America, Inc. (Investors) but failed to name Rosario-Paolo as a beneficiary. After a fire, Rosario-Paolo notified Investors of its security interest and claim to the insurance proceeds. Investors paid C&M directly. The New York Court of Appeals held that Investors, having received notice of Rosario-Paolo’s equitable lien, was liable to Rosario-Paolo for the proceeds up to the amount of its secured interest.

    Facts

    Rosario-Paolo sold a pizza restaurant to C & M on March 6, 1987. As part of the purchase price, C & M executed promissory notes for $63,000. A security agreement required C & M to insure the premises against fire and name Rosario-Paolo as a beneficiary. The agreement stipulated that in case of fire, insurance proceeds would be held in trust by Rosario-Paolo’s attorney to repair or replace damaged items. C & M filed a UCC-1 financing statement on April 9, 1987. C & M obtained an insurance policy from Investors on April 21, 1987, but failed to list Rosario-Paolo as a loss beneficiary. A fire occurred on January 19, 1988. Rosario-Paolo notified Investors by certified letter dated April 13, 1988, of its claim to any fire loss proceeds based on its security agreement. Investors issued a check for $49,598.52 to C & M on May 18, 1988, which C & M deposited into an individual account and refused to pay Rosario-Paolo.

    Procedural History

    Rosario-Paolo sued C & M and Investors. The Supreme Court granted summary judgment against C & M on default, denied summary judgment against Investors, and granted Investors’ cross-motion dismissing Rosario-Paolo’s claim against it. The Appellate Division affirmed. One Justice dissented, arguing that Investors should be liable because it had notice of Rosario-Paolo’s claim. The New York Court of Appeals reversed the Appellate Division’s order, granting Rosario-Paolo’s motion for summary judgment against Investors.

    Issue(s)

    Whether an insurer is liable to a third party who has an equitable lien on insurance proceeds when the insurer pays the insured despite having received notice of the third party’s claim.

    Holding

    Yes, because once an insurer has notice of a third party’s equitable claim to insurance proceeds, it pays the insured at its peril and assumes the risk of resisting the equity claimed by the third party.

    Court’s Reasoning

    The Court of Appeals reasoned that C & M’s covenant in the security agreement to insure the premises for Rosario-Paolo’s benefit created an equitable lien in favor of Rosario-Paolo on any insurance proceeds, up to the amount of its secured interest. Even though Investors had no duty to investigate the legitimacy of Rosario-Paolo’s claim, once it received notice of the claim, it was obligated to preserve the proceeds for the rightful owner. By paying C & M directly despite the notice, Investors assumed the risk of having to pay Rosario-Paolo. The court cited Cromwell v Brooklyn Fire Ins. Co., stating that Investors “assumed the hazard of resisting the equity claimed by the plaintiff.” The court distinguished McGraw-Edison Credit Corp. v Allstate Ins. Co., because in that case, the creditor lacked any legal or equitable claim to the policy proceeds. Here, the security agreement created a direct relationship and obligation. The court suggested that Investors could have protected itself by initiating an interpleader action to determine the rightful owner of the proceeds. The Court emphasized that C&M’s failure to name Rosario-Paolo as a loss beneficiary did not extinguish Rosario-Paolo’s equitable lien. The dissent in the Appellate Division was persuasive: Investors’ only obligation was to preserve the proceeds when confronted with conflicting claims.

  • Bard v. Bard, 73 N.Y.2d 813 (1988): Appellate Courts Cannot Grant Relief on Untried Theories

    Bard v. Bard, 73 N.Y.2d 813 (1988)

    An appellate court cannot grant relief to a party based on a new legal theory that was not presented at the trial court level, thereby denying the opposing party the opportunity to present evidence and defenses against that theory.

    Summary

    In a dispute arising from divorce proceedings, a husband sued his wife seeking a constructive trust over properties held in her name. The trial court dismissed the claim. While the appellate court agreed a constructive trust was not warranted, it granted the husband an equitable lien. The New York Court of Appeals reversed, holding that the appellate court erred by awarding relief on a theory (equitable lien) not raised at trial. The wife was prejudiced because she had no opportunity to present evidence or defenses, such as a statute of limitations defense, against this new theory.

    Facts

    The husband initiated an action against the wife seeking to impose a constructive trust on three parcels of land, the title to which was held solely by the wife. He requested that the properties be conveyed to him or, alternatively, sought monetary damages. This action was associated with, but separate from, two pending divorce actions between the parties.

    Procedural History

    The trial court, after a non-jury trial, found insufficient evidence to establish a constructive trust and dismissed the husband’s complaint. The Appellate Division agreed that the husband failed to prove a constructive trust. However, the Appellate Division determined that the husband was entitled to an equitable lien to the extent of 50% of the value of each of the three parcels. The wife appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether an appellate court can grant relief based on a legal theory (equitable lien) that was not pleaded or raised in the trial court.
    2. Whether the husband, who did not appeal the Appellate Division’s decision, can argue before the Court of Appeals that the evidence supports the imposition of a constructive trust.

    Holding

    1. No, because granting relief on a new theory at the appellate level denies the opposing party the opportunity to present evidence and defenses against that theory.
    2. No, because a party who does not appeal cannot obtain affirmative relief in the Court of Appeals.

    Court’s Reasoning

    The Court of Appeals held that the Appellate Division erred in granting the husband an equitable lien because this theory was not presented in the trial court. The wife had no opportunity to seek discovery, introduce evidence to rebut the claim, or raise defenses, such as the statute of limitations. The court noted that the wife plausibly asserted that she would have pleaded the six-year statute of limitations (CPLR 213, subd. 1) as a bar to the equitable lien claim had it been raised earlier. The court emphasized that appellate courts cannot use their equitable powers to grant relief on a new theory first introduced on appeal, especially when it prejudices the opposing party. Regarding the husband’s argument for a constructive trust, the court stated that because he did not appeal the Appellate Division’s decision, he could only present arguments to sustain the relief he received, not to obtain additional affirmative relief. The Court also pointed out that the affirmed finding that the wife did not promise to reconvey the property negated any right to a constructive trust, thus failing to support the Appellate Division’s disposition.

  • In re Howe, 1 Paige 125 (N.Y. Ch. 1828): Priority of Judgment Liens Over Subsequent Equitable Liens

    In re Howe, 1 Paige 125 (N.Y. Ch. 1828)

    A prior judgment lien, which is a general legal lien, takes precedence over a subsequent equitable lien, particularly when the equitable lien is based on a pre-existing debt rather than a new consideration advanced on the faith of the specific lien.

    Summary

    This case addresses the priority between a judgment lien and a subsequent equitable lien on real property. The court held that the judgment lien, being a prior legal lien, had priority over the equitable lien. The equitable lien, which arose from a pre-existing debt, lacked the merit of being created on new consideration advanced specifically on the credit of the property. The court reasoned that without such new consideration, the equities were equal, and the legal rights of the judgment creditor prevailed. The decision highlights the importance of legal liens and the circumstances under which equitable liens can take precedence.

    Facts

    Howe, the complainant, had an agreement with Allen whereby Allen would give Howe a mortgage on certain land within ten days of acquiring title. Before Allen acquired the title, a judgment was entered against him, creating a judgment lien. After Allen acquired the title, Howe sought to enforce his equitable lien (the promised mortgage) and claim priority over the judgment lien.

    Procedural History

    The case originated in the New York Court of Chancery. The complainant, Howe, sought a decree establishing the priority of his equitable lien over the defendant’s judgment lien. The lower court ruled against Howe, and he appealed.

    Issue(s)

    Whether a prior judgment lien, which is a general legal lien, takes precedence over a subsequent equitable lien on the same property, when the equitable lien is based on a pre-existing debt.

    Holding

    No, because to give an equitable lien priority over a pre-existing judgment lien would be going “further than any adjudged cases, and further than the principle upon which they are founded will warrant.”

    Court’s Reasoning

    The court reasoned that prior legal liens, such as judgment liens, generally have priority over subsequent equitable liens. The court distinguished cases where an equitable lien was created based on a new consideration advanced on the faith and credit of the specific lien. In this case, Howe’s equitable lien was based on an old debt. The court stated, “[I]n order to entitle the equitable lien to this preference, it should at least have the merit of having been created on some new consideration advanced bn the faith and credit of the specific lien then created—and not be founded on an old debt.” Because Howe’s equitable claim was based on a prior debt, the equities were equal, and the defendant’s legal right as a judgment creditor prevailed.

    The court also noted that the agreement between Howe and Allen allowed Allen ten days after acquiring title to execute the mortgage. This timeframe contemplated the possibility of intervening liens. The court reasoned, “At the date of this agreement the judgment was in existence, and the parties must be deemed to have contemplated the state of things which would have been produced, if the contract had been carried out according to its terms… Thus the defendant would have had the oldest lien.”