New York Law Review

Tag: mortgage foreclosure

  • Nassau Trust Co. v. Montrose Concrete Products Corp., 56 N.Y.2d 175 (1982): Oral Waiver as Defense to Foreclosure

    Nassau Trust Co. v. Montrose Concrete Products Corp., 56 N.Y.2d 175 (1982)

    A mortgagee’s oral waiver of the right to accelerate a mortgage and foreclose, granted to give the mortgagor a reasonable opportunity to negotiate a sale, is a valid defense to foreclosure absent reasonable notice of withdrawal of that waiver.

    Summary

    Montrose Concrete mortgaged property to Nassau Trust. After Montrose became delinquent, Nassau Trust allegedly made oral representations to waive default, allowing Montrose time to sell the property. Nassau Trust then commenced foreclosure. Montrose argued waiver, unconscionability, and unclean hands. The New York Court of Appeals held that genuine issues of material fact existed regarding whether Nassau Trust had waived its right to foreclose by granting Montrose time to sell the property. The Court reversed the Appellate Division’s order of summary judgment, reinstating the Special Term’s original order.

    Facts

    In February 1976, Montrose mortgaged property to Nassau Trust for a $300,000 loan, requiring quarterly payments. The agreement allowed Nassau Trust to accelerate the principal upon failure to make payments within 30 days. In February 1977, Montrose was delinquent, and Nassau Trust entered a written extension agreement with a clause prohibiting oral modifications. Montrose defaulted again, and in March 1979, Nassau Trust initiated foreclosure proceedings. Montrose alleged that Nassau Trust officers made oral representations at meetings in June, October, and December 1978, agreeing to waive any default in payment.

    Procedural History

    Nassau Trust sued to foreclose. Montrose pleaded affirmative defenses of waiver, unconscionability, and unclean hands, also asserting a counterclaim. Special Term denied Nassau Trust’s motion for summary judgment, finding issues of fact regarding waiver. The Appellate Division modified the order, striking the affirmative defenses and granting summary judgment of foreclosure. Montrose appealed to the New York Court of Appeals, which reversed the Appellate Division’s order and reinstated the Special Term order.

    Issue(s)

    1. Whether a mortgagee’s oral waiver of the right to accelerate the mortgage and foreclose, in order to allow the mortgagor time to sell the property, is a valid affirmative defense to foreclosure.
    2. Whether the provision in the extension agreement against oral change or termination forecloses the defense Montrose asserts.

    Holding

    1. Yes, because the unrefuted allegations raised a triable issue of fact as to whether Nassau Trust had waived its right to declare a default and foreclose.
    2. No, because the provision against oral change or termination speaks only to a change by agreement (modification) and not to a waiver.

    Court’s Reasoning

    The Court reasoned that while a modification of a mortgage requires consideration (or a statutory substitute like a signed writing), waiver and estoppel do not. Waiver requires only the voluntary and intentional abandonment of a known right. Estoppel requires a party to detrimentally rely on the opposing party’s words or conduct. The Court emphasized that an executory waiver can be withdrawn if the waiving party provides notice and a reasonable time to perform.

    The Court distinguished between an oral agreement purporting to modify a written agreement (requiring consideration) and an oral waiver of a right to require performance under that agreement. It cited cases where unwithdrawn waivers prevented the enforcement of original agreements, even without a legally binding modification.

    Quoting Judge Cardozo, the Court highlighted the principle that no one should benefit from their own inequity. The court noted that even with the clause against oral modifications, the bank may have waived its right to foreclose.

    The Court considered Louis Imperato’s affidavit, which alleged assurances from Nassau Trust, and found that these created a triable issue of fact regarding waiver. It also found a potential basis for estoppel because Montrose relied on those assurances to continue negotiations with Imperia, who withdrew when the foreclosure was initiated.

  • Roth v. Michelson, 55 N.Y.2d 278 (1982): Effect of Part Payment on Statute of Limitations for Mortgage Foreclosure

    Roth v. Michelson, 55 N.Y.2d 278 (1982)

    A part payment on a debt, after the statute of limitations has run, revives the debt only against the payor and subsequent purchasers who acquired the property without giving value or with actual notice of the payment.

    Summary

    This case concerns the effect of a part payment on a mortgage debt after the statute of limitations has expired. The Roths sought to foreclose on a mortgage. The court held that a payment made by one mortgagor after the statute of limitations had run did not revive the mortgage against subsequent purchasers (the Russos) who bought the property for value and without actual knowledge of the payment. The Court emphasized the need for actual notice to bind subsequent purchasers, protecting their reliance on the apparent expiration of the limitations period. The decision underscores the importance of clear notice and the limits of imputed knowledge in reviving time-barred debts affecting real property interests.

    Facts

    In 1960, the Roths loaned money to the Michelsons, secured by a second mortgage on their home.
    Only two payments were ever made: $400 in 1961 and $200 in 1973, made solely by Herbert Michelson. The Michelsons divorced and Herbert filed for bankruptcy in 1975, listing the mortgage as a secured debt.
    The Russos (Lillian Michelson’s parents) purchased the property at the bankruptcy sale in 1975 for $500, subject to existing liens. There was no evidence that the Russos had actual knowledge of the 1973 payment made by Herbert.

    Procedural History

    The Roths brought a foreclosure action. The trial court held that foreclosure was unavailable against Lillian’s interest because she was unaware of Herbert’s 1973 payment. However, the trial court found that Herbert’s payment kept the mortgage alive against his interest, which was conveyed to the Russos. The Appellate Division affirmed. The Russos appealed to the New York Court of Appeals.

    Issue(s)

    Whether a part payment on a mortgage debt by one mortgagor after the statute of limitations has run revives the right to foreclose the mortgage against subsequent purchasers who acquired the property for value without actual notice of the payment.

    Holding

    No, because the subsequent purchasers (the Russos) gave value for the property and did not have actual notice of the prior payment that would have revived the statute of limitations.

    Court’s Reasoning

    The court relied on General Obligations Law § 17-107(2)(a)(2), which states that a payment revives a debt and the right to foreclose against the person who made the payment and a person who subsequently acquires interest in the property without giving value or with actual notice of the payment.

    The Russos gave value ($500) for the property at the bankruptcy sale. The court did not consider this a nominal sum that would negate the “giving value” condition. More importantly, the Russos lacked actual knowledge of the 1973 payment made by Herbert Michelson. The court stated that the fact Lillian Michelson occupied the house, or that she is the daughter of the Russos or that these factors may have motivated the Russos to make the purchase does not qualify these requirements.

    The Roths argued that the Russos, by purchasing at a bankruptcy sale, were chargeable with knowledge of the contents of the bankruptcy schedule, which listed the mortgage. The court rejected this argument, stating that listing the mortgage did not equate to actual notice of the 1973 payment. “The scheduling of the 1960 mortgage balance, however, did not take the place of the “actual notice of the making of the [1973] payment’ called for by the plain wording of the statute”. The court emphasized the importance of the plain language of the statute. A bankrupt may include all items, regardless of merit, when attempting to have debts discharged.

  • Jemzura v. Jemzura, 36 N.Y.2d 496 (1975): Foreclosure of Mortgage on Inherited Property

    Jemzura v. Jemzura, 36 N.Y.2d 496 (1975)

    When property is inherited subject to a mortgage, the distributee is not personally liable for the mortgage debt beyond the value of the inherited property; the mortgage holder must first foreclose on the property, and a deficiency judgment can only be pursued against the estate and then the distributees to the extent of their inheritance.

    Summary

    Raymond Jemzura sought to foreclose a mortgage on a farm he partially owned as a tenant in common with his siblings after inheriting it from their father. The mortgage had been executed by the father in favor of another sibling, who then assigned it to Raymond. The trial court found an implied agreement where Raymond’s exclusive possession of the farm compensated for his waiver of interest on the mortgage. The Court of Appeals held that while the mortgage was valid, the judgment improperly imposed personal liability on the siblings. The court clarified that distributees inheriting mortgaged property are not personally liable beyond the value of the property and outlined the proper procedure for foreclosure and deficiency judgments.

    Facts

    John Jemzura executed a $10,000 mortgage on his farm in favor of his son, George Jemzura. George assigned the mortgage to another son, Raymond Jemzura. John Jemzura died intestate, leaving the farm to his children, Raymond, Gorton, Griffin, and George, as tenants in common. Raymond lived on the farm, using it for personal gardening and collecting resources. Raymond paid the property taxes beginning in 1964 but never requested contribution from his siblings. Gorton deeded her interest to Griffin. George defaulted.

    Procedural History

    Raymond Jemzura sued to foreclose on the mortgage. The trial court held the mortgage valid and enforceable, deducting payments and Raymond’s share as a co-tenant, setting the balance at $6,600, and awarding a judgment against all defendants. The Appellate Division affirmed without opinion. Defendant Griffin appealed to the Court of Appeals.

    Issue(s)

    Whether a distributee who inherits property subject to a mortgage is personally liable for the mortgage debt beyond the value of the inherited property.

    Holding

    No, because EPTL 3-3.6 and its predecessors make the mortgaged premises the primary source for payment of the mortgage debt, and a distributee’s liability is limited to the value of the inherited property after foreclosure proceedings.

    Court’s Reasoning

    The court relied on EPTL 3-3.6, which re-enacts section 20 of the Decedent Estate Law, which in turn embraced the general content of section 250 of the Real Property Law. These statutes dictate that mortgaged property inherited by a distributee is the primary source for mortgage debt payment. “The effect of EPTL 3-3.6, as well as that of said precursor sections, upon real property subject to a mortgage executed by an ancestor or testator and which descends to a distributee or passes to a testamentary beneficiary, is to make the mortgaged premises, as between the distributee or testamentary beneficiary and in the absence of a different testamentary direction, the primary source for payment of the mortgage debt.” The court emphasized that the mortgagee must first foreclose on the property. Only if a deficiency remains after the foreclosure sale can the mortgagee pursue a deficiency judgment against the deceased mortgagor’s estate. If the estate lacks sufficient assets, the distributees can be held liable, but only to the extent of the value of the property they received. The court found no merger of Raymond’s interests as mortgagee and tenant in common, so the mortgage remained valid. The court also upheld the finding of an implied agreement where Raymond’s exclusive possession compensated for waiving interest. However, the judgment was modified to remove the personal liability imposed on the defendants and to reflect the correct amount due on the mortgage, emphasizing the proper foreclosure procedure.

  • Whitestone Savings & Loan Assn. v. Allstate Insurance Co., 28 N.Y.2d 332 (1971): Insurable Interest After Foreclosure

    Whitestone Savings & Loan Assn. v. Allstate Insurance Co., 28 N.Y.2d 332 (1971)

    A mortgagee who bids the full amount of the secured debt at a foreclosure sale to acquire the mortgaged property extinguishes their insurable interest under a mortgagee loss payable clause in a fire insurance policy.

    Summary

    Whitestone Savings & Loan, the mortgagee, sought to recover under a fire insurance policy issued by Allstate Insurance after a fire damaged property owned by the Sandstroms, the mortgagors. After the fire, Whitestone foreclosed on the property and bid the full amount of the outstanding debt at the foreclosure sale, acquiring title. The court held that Whitestone’s insurable interest, as a mortgagee, terminated when it bid the full debt amount at the foreclosure sale, thus satisfying the mortgage. Therefore, Whitestone could not recover under the insurance policy.

    Facts

    The Sandstroms owned property valued at $18,000, insured for $14,000, and mortgaged to Whitestone Savings & Loan for $11,500. A fire caused approximately 50% damage to the property on April 17, 1967. Allstate, the insurer, offered to settle the fire loss for $7,471. Subsequently, on April 16, 1968, Whitestone foreclosed on the mortgage and bid $13,116.61, the full amount of the outstanding debt, at the foreclosure sale, acquiring title to the property.

    Procedural History

    The case originated in a lower court. Whitestone, as the mortgagee, sued Allstate, the insurer, to recover under the fire insurance policy. The Appellate Division affirmed the lower court’s decision, and the case was appealed to the New York Court of Appeals.

    Issue(s)

    Whether a mortgagee, who bids the full amount of the secured debt at a foreclosure sale to obtain the mortgaged property, retains an insurable interest that entitles it to sue on a fire insurance policy under a mortgagee loss payable clause.

    Holding

    No, because bidding the full amount of the debt at the foreclosure sale satisfies the mortgage, thereby terminating the mortgagee’s insurable interest.

    Court’s Reasoning

    The Court of Appeals reasoned that a mortgagee is only entitled to one satisfaction of their debt. By bidding the full amount of the debt at the foreclosure sale, Whitestone effectively converted the debt into property, thereby satisfying the debt. The court emphasized that Whitestone had the option to bid less, leaving a deficiency, but chose not to. This action extinguished Whitestone’s insurable interest as a mortgagee.

    The court distinguished the case from situations where the security is restored or increased in value after a fire, citing Savarese v. Ohio Farmers Ins. Co. (260 N. Y. 45). In Savarese, the mortgagee’s insurable interest was not diminished simply because the security had been restored. However, in this case, the debt itself was discharged, which is a critical distinction. The court stated, “The theory of recovery by a mortgagee is indemnity. The risk insured against is an impairment of the mortgaged property which adversely affects the mortgagee’s ability to resort to the property as a source for repayment. Where the debt has been satisfied in full subsequent to the fire, neither reason nor precedent suggest recovery on the policy by the mortgagee.”

    The court also highlighted the practical implications, noting that allowing the mortgagee to claim the property was worth less than the bid after cutting off other bidders would encourage fraud and create uncertainty. The court emphasized that the mortgagee had the opportunity to bid only the value of the property.

    In essence, the court underscored the principle that a mortgagee’s insurable interest is tied to the outstanding debt. Once that debt is satisfied through foreclosure, the insurable interest terminates, preventing unjust enrichment at the expense of the insurer. The Court emphasized, “As noted earlier, the authorities are unanimous to the effect that if subsequent to the fire the mortgagee has had its debt satisfied by purchase at foreclosure either by the mortgagee or a stranger, even by its bidding in of the outstanding debt, the mortgagee’s rights under the policy are terminated”.

  • White Plains Savings Bank v. Sam and Al Realty Co., Inc., 26 N.Y.2d 20 (1970): Intervention by Creditors in Foreclosure

    White Plains Savings Bank v. Sam and Al Realty Co., Inc., 26 N.Y.2d 20 (1970)

    A judgment creditor of a grantor who allegedly fraudulently conveyed property to the holder of the equity of redemption has a sufficient interest to intervene in a mortgage foreclosure action involving that property, especially when the referee makes unauthorized payments affecting potential surplus funds.

    Summary

    Nesmith, a judgment creditor of Sam and A1 Realty Co., Inc., and Vucker, a holder of a promissory note from the same company, sought to intervene in a mortgage foreclosure action. They alleged that Sam and A1 Realty fraudulently conveyed the property to White Plains Realty Co., Inc., rendering Sam and A1 Realty judgment proof. The referee in the foreclosure action paid taxes from the sale proceeds, contrary to the foreclosure judgment stating the sale would be “subject to unpaid taxes.” Nesmith and Vucker argued this payment reduced surplus funds they could potentially claim. The lower courts denied their motion to intervene, deeming their interest too remote. The Court of Appeals reversed, holding that the creditors had a sufficient interest to intervene, especially given the referee’s unauthorized payment.

    Facts

    Sam and A1 Realty Co., Inc. conveyed real property to White Plains Realty Co., Inc., a newly formed corporation. Nesmith was a judgment creditor of Sam and A1 Realty, and Vucker held a promissory note from them. Nesmith and Vucker claimed the conveyance was fraudulent, rendering Sam and A1 Realty judgment proof. White Plains Savings Bank initiated a mortgage foreclosure action on the property now held by White Plains Realty. The foreclosure judgment ordered the referee to sell the property “subject to unpaid taxes.” After the sale, the referee paid the mortgage claim and other costs, then used the remaining funds to pay taxes and tax liens against the property.

    Procedural History

    The plaintiff moved to confirm the referee’s report of sale. Nesmith and Vucker moved to intervene, opposing the motion on the grounds that the referee wrongfully paid taxes contrary to the foreclosure judgment. Special Term denied the motion to intervene, stating it lacked the power to permit intervention because the applicants were not direct creditors of the record holder of the equity of redemption, and the holder did not object. The Appellate Division affirmed, holding the appellants’ interest was too remote. The Court of Appeals granted leave to appeal and certified the question of whether the Appellate Division’s order was correctly made.

    Issue(s)

    Whether the interest of judgment creditors of a grantor who allegedly fraudulently conveyed property to the holder of the equity of redemption is too remote to allow them to intervene in a mortgage foreclosure action involving that property.

    Holding

    No, because the judgment creditors have a sufficient interest in potential surplus funds resulting from the sale, especially when the referee makes unauthorized payments that could affect the amount of those funds.

    Court’s Reasoning

    The Court of Appeals relied on Goodell v. Harrington, 76 N.Y. 547 (1879), which held that a judgment creditor of the equity holder’s grantor could intervene in a similar situation. The Court reasoned that because the property constituted a fund from which the intervenor might satisfy his judgment if he prevailed on the fraudulent conveyance claim, the interest was sufficient. The Court found the present case analogous to Goodell, stating, “The intervenor in both cases is a creditor of the person who has conveyed the subject property, allegedly by a fraudulent conveyance, to the holder of the equity of redemption.” The Court emphasized that the referee’s payment of taxes, contrary to the foreclosure judgment, was an act beyond his power. This unauthorized payment directly affected the potential surplus money to which the creditors might have a claim. The Court concluded that the lower courts erred in holding they lacked the power to allow intervention, and reversed the order confirming the referee’s report. The court emphasized that the property represented a potential fund for satisfying the creditors’ claims, making their interest direct and substantial enough to warrant intervention.

  • Fifth Ave. Bldg. Co. v. Kernochan, 221 N.Y. 370 (1917): Lessor’s Liability for Breach of Covenant of Quiet Enjoyment After Transferring Title

    Fifth Ave. Bldg. Co. v. Kernochan, 221 N.Y. 370 (1917)

    A lessor who covenants for quiet enjoyment is liable for breach of that covenant even after transferring title to the property, particularly if the breach results from the lessor’s failure to take necessary measures, such as paying interest on an existing mortgage.

    Summary

    Fifth Ave. Bldg. Co. leased property from Kernochan, who later conveyed the property to another party. The lease contained a covenant for quiet enjoyment. When the new owner defaulted on the mortgage, the plaintiff, Fifth Ave. Bldg. Co., was evicted. The court addressed whether Kernochan was liable for breach of the covenant of quiet enjoyment despite no longer owning the property. The Court of Appeals held that Kernochan was liable, emphasizing that the covenant was not conditional on continued ownership and that a lessor cannot simply abandon their obligations by transferring title. The Court reasoned that the lessor’s failure to protect the lessee from foreseeable risks, like mortgage foreclosure, constituted a breach.

    Facts

    1. Kernochan owned premises in New York City and mortgaged them.
    2. Kernochan conveyed the property to the defendant.
    3. Fifth Ave. Bldg. Co., knowing about the mortgage, leased part of the building from Kernochan for five years with an option to renew for another five. The lease included a covenant for quiet enjoyment.
    4. Kernochan paid the mortgage interest while he owned the property.
    5. Kernochan conveyed the property to another party.
    6. The new owner defaulted on the mortgage.
    7. The mortgage was foreclosed, and Fifth Ave. Bldg. Co. was evicted.

    Procedural History

    Fifth Ave. Bldg. Co. sued Kernochan for breach of the covenant of quiet enjoyment. The trial court directed a verdict against Fifth Ave. Bldg. Co. The judgment was affirmed by the appellate division. Fifth Ave. Bldg. Co. appealed to the New York Court of Appeals.

    Issue(s)

    Whether a lessor who covenants for quiet enjoyment remains liable for a breach of that covenant after conveying title to the property, when the breach arises from a pre-existing mortgage on which the new owner defaults.

    Holding

    Yes, because the lessor’s covenant for quiet enjoyment is a continuing obligation that survives the transfer of title, and the lessor is responsible for taking measures to ensure the lessee’s peaceful enjoyment of the premises for the term of the lease.

    Court’s Reasoning

    The court emphasized that the covenant for quiet enjoyment was unconditional. Kernochan promised that Fifth Ave. Bldg. Co. would “peaceably and quietly have, hold and enjoy the said demised premises for the term aforesaid.” The court stated, “His promise was not conditional upon his retention of title, nor upon the lessee’s ignorance of the existence of the mortgage nor upon refusal to pay rent to the grantee. Without qualification the compact was made. Its obligation has not been fulfilled.”

    The court distinguished this case from Wagner v. Van Schaick Realty Co., noting that the facts were different. The court stated, “When a lessor covenants for quiet enjoyment, he is bound to take such measures in relation to the mortgage as will enable him to accomplish the purpose of his covenant. His promise survives his divestment of title. If he is at fault in failing to provide payment of interest on the mortgage, even after he has ceased to hold title to the premises, he must answer for his fault. His interest in the lease continues to the extent of his covenant and he will not be allowed to abandon the obligations which he has assumed. He is liable for the loss of the bargain.”

    The court cited Mack v. Patchin and Friedland v. Myers, establishing that the lessor is liable for damages when at fault for failing to protect the lessee’s rights under the covenant. The court recognized exceptions to the ordinary rule of damages, especially when the lessor fails to remedy defects in title or refuses to incur expenses to fulfill the contract.