New York Law Review

Tag: Good Faith Purchaser

  • LeChase Data/Telecom Services, LLC v. Goebert, 6 N.Y.3d 281 (2006): Defining ‘Notice’ for Good Faith Purchasers under New York Lien Law Article 3-A

    6 N.Y.3d 281 (2006)

    Under Article 3-A of the New York Lien Law, a ‘purchaser in good faith for value and without notice’ of diverted trust assets is not necessarily required to have actual knowledge of the diversion; UCC 1-201(25) supplies the appropriate standard of notice, encompassing actual knowledge, notification, or reason to know based on the circumstances.

    Summary

    This case clarifies the standard of ‘notice’ required to disqualify a factor from the ‘good faith purchaser’ exemption under Lien Law Article 3-A. LeChase, a subcontractor, sued Business Funding Group (BFG), a factor who had been assigned accounts receivable from Light House, the general contractor. LeChase claimed that BFG had received payments from WorldCom (the owner) that constituted diverted trust funds. The court held that actual knowledge of the diversion is not required; ‘notice’ under UCC 1-201(25) is sufficient, meaning BFG either knew, received notification, or had reason to know of the diversion based on the circumstances. The Court found BFG had sufficient information in the work orders to be on notice that Light House was performing construction, not just design, and thus summary judgment was granted to LeChase.

    Facts

    Light House had a master agreement with WorldCom for telecommunications work. To secure working capital, Light House entered into a factoring agreement with BFG, assigning its accounts receivable in exchange for advances. Light House instructed WorldCom to pay invoices directly to BFG. LeChase subcontracted with Light House to perform construction work. LeChase completed its work but was not fully paid by Light House. LeChase then sued BFG, alleging diversion of statutory trust funds under Article 3-A of the Lien Law because BFG received payments from WorldCom for work LeChase performed.

    Procedural History

    LeChase sued Light House, WorldCom, and BFG for breach of contract and diversion of statutory trust funds. LeChase moved for summary judgment, arguing BFG received trust funds with knowledge of their trust nature. BFG cross-moved for summary judgment, claiming it was a ‘purchaser in good faith for value and without notice’ under Lien Law § 72(1). Supreme Court denied both motions, finding a triable issue of fact regarding notice. The Appellate Division reversed, granting BFG’s cross-motion, holding that LeChase needed to establish actual notice to overcome the good faith purchaser defense. The Court of Appeals reversed the Appellate Division.

    Issue(s)

    1. What standard of ‘notice’ applies to a ‘purchaser in good faith for value and without notice’ under Lien Law § 72(1)?

    2. Did Business Funding have sufficient ‘notice’ that it was receiving trust funds, thereby precluding it from claiming the good faith purchaser defense?

    Holding

    1. No, actual knowledge is not required. The standard of ‘notice’ under UCC 1-201(25) applies, because it encompasses actual knowledge, notification, or reason to know based on the facts and circumstances.

    2. Yes, because BFG had access to work orders detailing construction services, knew WorldCom construction managers had to approve invoices before payment, and had the right to Light House’s contracts. This information provided sufficient notice that BFG was receiving payments related to construction, negating the ‘good faith purchaser’ defense.

    Court’s Reasoning

    The Court reasoned that Article 3-A of the Lien Law aims to ensure payment to those who improve real property. Diversion of contract funds before payment of all trust claims is an improper diversion of trust assets. The Court distinguished prior cases, like I-T-E Imperial Corp. v. Bankers Trust Co., because those cases involved banks that were merely depositories of funds, not parties in a contractual relationship with the contractor. The Court stated that the subjective standard of notice applied in cases dealing with negotiable instruments (Articles 3 and 4 of the UCC) is not applicable here.

    The Court relied on UCC 1-201(25), which defines notice as either actual knowledge, receipt of notification, or reason to know based on the circumstances. Because BFG had a contractual relationship with Light House, possessed copies of work orders describing construction work, and knew that WorldCom construction managers had to approve invoices, it had sufficient information to be on notice that it was receiving trust funds. The Court also pointed out that BFG could have protected itself by filing proper Lien Law notices. As the Court explained, the master agreement “included construction among these services, and the work orders detailed the construction work.” Further, “Business Funding regularly contacted WorldCom’s construction managers, and knew that WorldCom would not pay an invoice from Light House until a construction manager signaled satisfactory completion of the work billed.”

  • Matter of Bankers Trust Co. v. State, 449 N.Y.S.2d 813 (1982): Good Faith Purchaser Status Under Lien Law and UCC

    449 N.Y.S.2d 813 (1982)

    The adoption of the Uniform Commercial Code (UCC) changed the standard for determining good faith purchaser status from an objective “duty of inquiry” standard to a subjective standard, amending the Lien Law accordingly.

    Summary

    This case addresses whether Bankers Trust qualified as a “purchaser in good faith for value” under the Lien Law concerning trust assets. The plaintiffs argued that Bankers Trust had notice of facts sufficient to create a duty of inquiry, which should bar it from claiming good faith purchaser status. The court held that the adoption of the Uniform Commercial Code (UCC) replaced the objective “duty of inquiry” standard with a subjective standard for determining good faith. Therefore, absent reliance on the “duty of inquiry” concept, the plaintiff’s claim was meritless. The order of the Appellate Division was affirmed.

    Facts

    The core dispute revolves around whether Bankers Trust should be considered a “purchaser in good faith for value” concerning certain trust assets under New York’s Lien Law. The plaintiffs contended that Bankers Trust had sufficient notice that should have triggered a duty of inquiry, thus disqualifying it from claiming good faith purchaser status. This notice, they argued, stemmed from facts known to Bankers Trust at the time of the transaction.

    Procedural History

    The lower court’s decision was appealed to the Appellate Division, which ruled in favor of Bankers Trust. The plaintiffs then appealed to the New York Court of Appeals.

    Issue(s)

    Whether the legislative history of Article 3-A of the Lien Law requires incorporating a “duty of inquiry” limitation for determining “purchaser in good faith” status, based on the 1958 Law Revision Commission report and prior case law.

    Holding

    No, because the adoption of the Uniform Commercial Code (UCC) effectively amended the Lien Law by changing the standard for determining good faith purchaser status from an objective “duty of inquiry” standard to a subjective standard.

    Court’s Reasoning

    The Court of Appeals held that while the legislative history of Article 3-A of the Lien Law might suggest an intent to incorporate a “duty of inquiry” limitation, the actual wording of the statute indicates a purpose to align with negotiable instruments rules. More importantly, the court emphasized that the subsequent adoption of the UCC, specifically regarding notice requirements under Articles 3 and 4, fundamentally changed the legal landscape. The UCC replaced the objective “duty of inquiry” standard with a subjective standard for determining good faith. As the court noted, “With the adoption, effective September 27, 1964, of the Uniform Commercial Code, the concept of notice under article 3 (and by analogy under article 4 as well, cf. Uniform Commercial Code, § 4-209) has, as we have held in Chemical Bank of Rochester v Haskell, been changed from an objective to a subjective standard, and that change must be deemed to have amended the Lien Law as well.” The court referenced statutory interpretation principles (1 McKinney’s Cons Laws of NY, Book 1, Statutes, §§ 197, 370) to support the view that the UCC amendments implicitly modified the Lien Law. Because the plaintiffs’ claim relied on the “duty of inquiry” concept, which was no longer valid after the UCC’s adoption, the court found their argument without merit. The court also cited UCC § 4-208(1)(a) and § 4-208(2) to support the Appellate Division’s reasoning.

  • Szemko v. General Cas. Co. of America, 36 N.Y.2d 43 (1974): Insurable Interest of a Good Faith Purchaser of Stolen Property

    Szemko v. General Cas. Co. of America, 36 N.Y.2d 43 (1974)

    A purchaser of stolen property, who buys it in good faith and for value, has an insurable interest in the property up to its value, based on their right to possess the property against all but the true owner.

    Summary

    Szemko purchased a car later discovered to be stolen and insured it with General Casualty Co. After the car was stolen from Szemko, General Casualty refused to pay, arguing Szemko lacked an insurable interest. The New York Court of Appeals held that a good faith purchaser for value has an insurable interest in the stolen property because they have a right to possession against all but the true owner, and would suffer direct pecuniary loss if the property were damaged or destroyed. This decision upholds the principle that insurance should cover genuine economic interests and not be used for wagering.

    Facts

    • Plaintiff Szemko purchased an automobile.
    • Szemko insured the automobile with General Casualty Company of America.
    • The automobile was later stolen from Szemko.
    • It was subsequently determined that the automobile had been stolen prior to Szemko’s purchase.
    • General Casualty refused to pay out on the insurance policy, asserting Szemko lacked an insurable interest in the vehicle.
    • The lower courts affirmed that Szemko was a purchaser for value without knowledge that the car was stolen.

    Procedural History

    • The trial court found in favor of Szemko.
    • The Appellate Term affirmed the trial court’s decision.
    • The Appellate Division also affirmed.
    • The case was appealed to the New York Court of Appeals.

    Issue(s)

    Whether a purchaser of a stolen automobile, who buys it in good faith and for value, has an insurable interest in that automobile.

    Holding

    Yes, because the purchaser has a right to possession of the car against any contrary assertion except that of the true owner, and would sustain a direct pecuniary loss if the car were destroyed.

    Court’s Reasoning

    • The court relied on the precedent set in National Filtering Oil Co. v. Citizens’ Ins. Co. of Mo., 106 N.Y. 535, which stated that a legal or equitable interest in the property is not necessary to support insurance, only that the assured is “so situated as to be liable to loss if it be destroyed by the peril insured against”.
    • The court stated that an insurable interest exists when “there be a right in or against the property which some court will enforce upon the property, a right so closely connected with it and so much dependent for value upon the continued existence of it alone, as that a loss of the property will cause pecuniary damage to the holder of the right against it, he has an insurable interest”.
    • The court addressed the concern that insurance contracts should not be wagering contracts, emphasizing that Szemko had a genuine economic interest in the car.
    • The court cited decisions in other states (New Jersey and Washington) that held a good faith purchaser of a car has an insurable interest.
    • The court distinguished Nieschlag & Co. v. Atlantic Mut. Ins. Co., 43 F. Supp. 797, where the insured had no possession or right to possession of the goods represented by a fraudulent receipt, giving them nothing to assert against anyone.
    • The court concluded that Szemko’s right to possession, though limited, was insurable, solidifying the idea that insurance should cover genuine economic interests.

  • Scarola v. Insurance Co. of North America, 31 N.Y.2d 411 (1972): Insurable Interest for Good Faith Purchaser of Stolen Property

    31 N.Y.2d 411 (1972)

    A purchaser of stolen property who buys it in good faith and for value has an insurable interest in the property, based on their right to possession against all but the true owner.

    Summary

    Scarola purchased a car later discovered to be stolen and insured it. After the car was stolen from Scarola, the insurance company denied the claim, arguing Scarola lacked an insurable interest. The court held that an innocent purchaser for value has an insurable interest because they have a right to possession against all but the true owner, which constitutes a substantial economic interest. This decision highlights the balance between preventing wagering contracts and protecting innocent parties in commercial transactions.

    Facts

    Scarola purchased a used Cadillac from an unknown salesman. He registered the car in New York and obtained an insurance policy from the Insurance Company of North America. Three days later, the car was stolen from Scarola. The insurance company discovered the car had a false serial number, suggesting it was stolen, and denied Scarola’s claim based on lack of insurable interest. Scarola claimed he was an innocent purchaser.

    Procedural History

    The trial court found that Scarola was an innocent purchaser of a stolen vehicle and awarded him judgment. The Appellate Term affirmed, and the Appellate Division also affirmed. The Insurance Company of North America appealed to the New York Court of Appeals.

    Issue(s)

    Whether an innocent purchaser for value of a stolen automobile has an insurable interest in that vehicle under New York Insurance Law § 148, such that they can recover under an insurance policy when the vehicle is stolen from them?

    Holding

    Yes, because the innocent purchaser has a right to possession against all but the true owner, which constitutes a lawful and substantial economic interest in the safety or preservation of the property from loss.

    Court’s Reasoning

    The court reasoned that Scarola, as a good faith purchaser, had a right to possession of the car against anyone except the true owner. This right, even if limited, constitutes an insurable interest. The court cited National Filtering Oil Co. v. Citizens’ Ins. Co. of Mo., noting that an insurable interest exists if the insured is situated such that they would suffer a direct loss from the property’s destruction. The court emphasized that the underlying policy problem is preventing wagering contracts, and since Scarola had a real economic interest, the insurance policy was not a wagering contract. The court also noted that other states (New Jersey and Washington) have similarly held that good faith purchasers have an insurable interest. The dissenting judge argued that the purchaser’s interest was not “substantial” enough to qualify as an insurable interest under the statute, as the true owner could reclaim the car at any moment.

  • Lacustrine Fertilizer Co. v. Lake Guano & Shell Fertilizer Co., 82 N.Y. 476 (1880): Recording Act and Constructive Severance of Land

    Lacustrine Fertilizer Co. v. Lake Guano & Shell Fertilizer Co., 82 N.Y. 476 (1880)

    An unrecorded conveyance of an interest in real estate, such as the right to remove marl, is void against a subsequent purchaser in good faith for valuable consideration, and the doctrine of constructive severance cannot be applied to defeat the rights of such purchasers under the recording act.

    Summary

    This case concerns a dispute over ownership of marl deposits. Torrey, the original landowner, excavated marl and deposited it on his land. He then sold the land to Spaulding, excepting the marl with a right to remove it within ten years. Torrey later conveyed the marl to Barnum, but this conveyance was unrecorded. Torrey reacquired the land and sold it to Evans, who had no actual notice of the Barnum conveyance. The court held that the unrecorded conveyance to Barnum was void against Evans, a subsequent good faith purchaser, and that the marl was real estate subject to the recording act, not personal property due to constructive severance.

    Facts

    Between 1851 and 1853, the State excavated marl from land owned by Torrey during canal construction. The marl was deposited on the banks of the cut. In 1865, Torrey conveyed the land to Spaulding, excepting the marl deposits with a ten-year right of removal. In 1866, Torrey conveyed the marl to Barnum. This conveyance was not recorded. Torrey reacquired the land in 1869 through foreclosure. In 1874, Torrey’s devisees conveyed the land to Evans. Evans had no actual notice of the conveyance to Barnum. The plaintiff, deriving title from Barnum, sued the defendant, who succeeded to Evans’s title, claiming ownership of the marl.

    Procedural History

    The Special Term dismissed the complaint, and this appeal followed to the Court of Appeals of New York. The Special Term originally dismissed the case arguing a legal action was needed to determine title before an equitable injunction could be issued. The Court of Appeals affirmed the judgment, though on different grounds, focusing on the application of the recording act.

    Issue(s)

    1. Whether the marl, after being excavated and deposited on the land, remained part of the real estate?
    2. Whether the conveyance of the marl from Torrey to Barnum was a conveyance of real estate within the meaning of the recording act?
    3. Whether Evans was a good faith purchaser for valuable consideration without notice of the prior unrecorded conveyance to Barnum?

    Holding

    1. Yes, the marl remained part of the real estate because it was incorporated into the soil and intended to remain permanently.
    2. Yes, the conveyance of the marl was a conveyance of an interest in real estate under the recording act because it involved the sale of a part of the soil.
    3. Yes, Evans was a good faith purchaser because he paid valuable consideration and had no constructive notice of Barnum’s unrecorded deed.

    Court’s Reasoning

    The court reasoned that the marl, once deposited on Torrey’s land, became part of the realty. The exception in Torrey’s deed to Spaulding was a reservation of an interest in the land, terminable after ten years. The subsequent conveyance to Barnum was a conveyance of an interest in real estate. Because the Barnum conveyance was unrecorded, it was void against Evans, a subsequent purchaser in good faith and for valuable consideration. The court rejected the argument that the marl became personal property through constructive severance, stating that such a theory would undermine the purpose of the recording act, which is to protect bona fide purchasers. The court emphasized that “the term ‘conveyance,’ as used in that act, ‘shall be construed to embrace every instrument in writing by which any estate or interest in real estate is created, aliened, mortgaged or assigned; or by which the title to any real estate may be affected in law or equity.’” They distinguished growing crops from standing timber or marl deposits, noting the latter are interests in land and subject to the recording act. The court also noted that Evans’s status as a good faith purchaser protected subsequent grantees, regardless of their knowledge of the unrecorded conveyance, citing Wood v. Chapin. The court also noted the trial court could have refused to hear the equitable action until the legal title was settled in a pending replevin action. The court noted: “We think it must be a general rule that the owner of land cannot, by agreement between himself and another, make that which in its nature is land, personal property, as against a subsequent purchaser for value, without notice, there having been no actual severance of the subject of the agreement, when the subsequent grant was made, and we are also of opinion that, in the case supposed, the doctrine of constructive severance cannot be applied to defeat the rights of subsequent purchasers under the recording act.”