Foreclosures—Lender Took a Mortgage From Only One of Three Joint Owners—Court Rejects Lender’s Claim for an Equitable Mortgage or Other Equitable Relief Against the Other Two Owners—Action to Quiet Title

Plaintiffs “A” and “B” initially purchased property as tenants in common (TIC) in 2002. In June 2005, “B” transferred his interest to “C” and that transfer was recorded. On the same day, “A” and “C” entered into a “Consolidation, Extension, and Modification Agreement” (CEMA) with their mortgage lender. The CEMA was also recorded. In May 2008, “A” and “C” brought “B” back into the ownership chain and the property was deeded to “all three as [TIC]” and that transfer was also recorded.

A year later, in March 2009, “A” refinanced the property with the defendant (lender). “B” and “C” “were not grantors or otherwise mentioned in this mortgage or any of the mortgage documents, nor did they sign the mortgage or mortgage note; only ['A'] signed the mortgage and note.” The mortgage proceeds were used to pay off a prior mortgage. Part of the proceeds were also distributed to “A,” “B’s” wife, “C” and a child of “C.” The prior lender filed a satisfaction of the CEMA.

At the March 2009 refinance closing, the mortgage was provided to “Empire Land Services for recording. Empire…did not file the mortgage.” It took the lender more than two years to discover that the mortgage had not been filed. In October 2011, the lender requested that “A” re-sign the mortgage, so that it could be recorded, which he did. The re-signed mortgage was recorded. The lender had not requested that either “B” or “C” execute the mortgage or the note.

“A,” “B” and “C” commenced the subject action to “quiet title” in state court. The defendants removed it on diversity grounds and because one of the defendants was the Federal Home Loan Mortgage Corporation. The plaintiffs had also sued the Mortgage Electronic Registration Systems (MERS), “which is acting either as nominal holder by assignment and/or servicer of the [subject] mortgage.”

The plaintiffs asserted that the lender’s mortgage was “a ‘nullity’ or ‘void as a matter of law’” based on several alleged “technical deficiencies” and several legal theories.

Thereafter, the plaintiffs had voluntarily dismissed their amended complaint. However, the defendants had asserted counterclaims. The defendants sought “to impose an equitable mortgage on the interests in the property held by ['B'] and ['C'] effectively bringing them within the mortgage granted to [the lender] by ['A'].” Alternatively, the defendants sought to “reinstate the [CEMA] and ‘equitably subrogate’ themselves to that mortgage so they are in effect standing in the shoes that [the prior lender] wore before the proceeds of the [lender's] mortgage to ['A'] satisfied the…CEMA.” Alternatively, the defendants sought damages in the amount of the lender’s mortgage “under a theory of unjust enrichment.” The defendants had also filed a third-party complaint against their title insurer, based on its refusal to provide coverage against the plaintiffs’ claims. The defendants had moved for summary judgment on their counterclaims.

The court explained:

Under New York law, a court will impose an equitable mortgage where the facts surrounding a transaction evidence that the parties intended that a specific piece of property be held or transferred to secure an obligation. …”New York Courts have consistently held that the basis for imposing an ‘equitable mortgage’ is clear evidence of the intent of all the parties to the transaction to encumber or place a lien on a specific parcel of real property.”

The court noted that although “‘actual intent’ was not essential,” “even an ‘implied agreement’ requires a mutual intent of the parties to have imposed a legal mortgage.”

The court found that the intent of the parties was not “unequivocal.” Unlike cases cited by the lender, in the instant situation, there was “nothing wrong or defective about the mortgage” the lender obtained from “A.” “This was not a case where a signature page was missing…or where the mortgage documents erroneously described the property so that nothing was encumbered….” The lender had relied on cases where lenders had “obtained nothing or where a scrivener’s error had occurred, thwarting the parties’ intent.”

In the subject case, when the mortgage was finally recorded, the lender had “obtained a perfected lien on ['A's'] interest.” If “A” had defaulted, the lender could have foreclosed on the mortgage, acquire “A’s” interest and commence an action for “partition as a [TIC]” and compel “ a sale of the property to satisfy ['A's'] debt.”

Although no information about the value of the property had been offered to demonstrate that the lender could not have been wholly repaid by foreclosing on “A’s” interest, even if a valuation had indicated “some risk of inadequate equity,” the lender had “not shown a reason why it was precluded from assuming that risk.”

The lender had not explained “why the mortgage was drafted solely with regard to ['A's'] interest.” The court opined that had the papers been drafted for all three owners to sign and only “A” had done so, the lender would have been on “firmer footing.” Now, “with the benefit of hindsight,” the lender refers to the “absence of any reference to ['B'] and ['C'] as a mistake, although it has offered no evidence to confirm this.” The court noted that “if it was a mistake, it is even more peculiar that two years later, when [lender] sought belatedly to record the mortgage and asked ['A'] to re-execute it, [lender] did not notice the mistake at that time and at least request that the mortgage be amended to include ['B'] and ['C']. At the very least, the failure to do so is inconsistent with [lender's] claim as to the parties’ intent; at most, it is affirmative evidence that [lender] redid correctly that which it had attempted to do but did incorrectly two years earlier, namely obtain a mortgage on ['A's'] interest in the property.”

The salient issue was whether the lender had “proven that ['B'] and ['C'] implicitly intended to mortgage their interests along with ['A's'], or stated in [lender's] later-offered terms, whether they were unjustly enriched by obtaining releases of the…CEMA as well as cash without replacing the…CEMA with the [lender's] mortgage.”

The lender argued that “B” and “C” “received value and did not give anything for it.” However, the value that “B” and “C” received was “fully consistent with an agreement between ['A'] and ['B'] and [lender] as to the distribution of the mortgage proceeds. …['A'] could have kept all the proceeds or, as he did, direct distribution to and pay off the debts of whomever he wished.” Distributions went to “B’s” wife and “C’s” son, neither of whom had anything to do with the prior mortgage or the lender’s mortgage, and the lender was “not seeking to recover the distributions to them.”

The court opined that such distributions tended “to show that no inference can be clearly drawn from the mere fact that both ['C'] and ['B'] received a benefit from the transaction, and further confirm that ['A'] and [lender] agreed as to the distribution of the proceeds in the manner in which they were distributed.” It further showed that “A” and lender “had an intent beyond the mere replacement of the…CEMA.”

The court emphasized that “[t]he proponent of an equitable lien on property must establish the existence of ‘a clear intent between the parties that such property be held, given or transferred as security for an obligation’….” Here, the lender relied “exclusively on documents which contain no indication that there is anything wrong with them and accomplish exactly what they appear on their face to have sought to accomplish.” The fact that the lender’s mortgage proceeds “were used to free ['B'] and ['C's'] interests from the prior mortgage while encumbering ['A's'] interest does not ipso facto demonstrate any inequity, certainly not inequity sufficient to support an equitable mortgage.”

The court noted that “a party’s ‘mere expectation, however sincere, is insufficient to establish an equitable lien.’” Additionally, the “standard of proof for claimants seeking this relief is ‘clear evidence’ or…’clear and convincing evidence.’” In sum, “the failure of a lender to obtain a mortgage on all joint owners’ interests does not by itself meet this burden, even if the non-mortgagor joint owners receive a benefit from the mortgage.” Accordingly, the court held that the lender had “failed to prove its entitlement to an equitable mortgage.”

The court further held that the lender was “not entitled to the complicated equitable remedy of partial reinstatement of the [prior] mortgage with a contemporaneous subordination of that mortgage to that of [lender].” The court also rejected the “unjust enrichment” claim based on “B” and “C” receiving part of the proceeds and noted that “the third-party complaint is likely moot.” The parties to the third-party action were directed to advise the court of how they intend to proceed.

Pallian v. Metlife Bank, 12 Civ. 4639, NYLJ 1202608756432, at *1 (EDNY, Decided June 20, 2013), Brian Cogan, J.

Land Use—Board of Zoning Appeals’ Denial of Area Variance Overturned—Board’s Determination Was Conclusory and Lacked “Rational Support in the Evidentiary Record”—Self-Created Hardship Defense Inapplicable

The petitioners had commenced a CPLR Article 78 proceeding, seeking to annul a determination of the respondent Board of Zoning Appeals (ZBA) which had denied the petitioners’ application for a floor area variance.

In August 2002, the petitioners had purchased a home in a residential zoning district. The home’s attic “is currently improved with three bedrooms and a bathroom” and was built to a ceiling height of seven feet, ten inches. The home was on a lot that was 11,607 square feet. The local Village Code (code) imposes an 8,000 square foot minimum lot area and a .40 floor to area ratio (FAR) requirement.

The petitioners alleged that prior to 2011, the code provided for a 400 square foot FAR exemption, applicable to garages and also “exempted attic space from the relevant FAR calculation.” However, pursuant to certain 2011 amendments, “attic areas with ceilings exceeding six feet, six inches in height were included in the FAR calculation—while the garage exemption was reduced from 400 to 200 square feet.” “Applying the relevant FAR provisions, as amended, to the subject premises, yields a floor area of 4,715 square feet (.40 x 11,607), or non-conforming .406 FAR,” approximately 73 square feet in excess of the allowable 4,642 floor to area square footage.

According to the petitioners, prior to the 2011 amendments, the home conformed to the then applicable FAR requirements.

In February 2012, the petitioners submitted several variance applications to the ZBA, seeking permission to perform various renovations to their home. An original proposal would have increased the existing FAR non-conformity from 73 square feet to 1308 square feet (a proposed .512 FAR). The petitioners also requested rear-yard coverage and set back variances. The petitioners had amended their application to eliminate the need for the rear yard coverage variance. The amended application would create “additional distance from the relevant, adjoining property—particularly in light of an existing six-foot village reserve strip or easement already located along that property line.”

The ZBA, inter alia, denied (without written factual findings or reasoning), “the petitioners’ modified FAR variance request.” The petitioners thereafter submitted an amended application which provided for a reduced, proposed floor area. They proposed to decrease the attic ceiling height to six feet five inches. The new proposal still exceeded the permitted floor area by approximately 184 feet. This equated to a FAR value of .416, approximately 4 percent more than the allowable figure.

The petitioners argued that “the home’s current FAR would have been conforming had it not been for the 2011 Code amendments, which were enacted well after the petitioners acquired the property in 2002; and…the latest, proposed FAR of .416 exceeded the home’s base or existing FAR of .406 by only 0.10—an alleged de minmis difference…”; “the proposed building area of 24 percent…was still considerably less [than] the 35 percent (4,042) square footage allowed by the Code”; “if the six-foot Village reserve strip…was considered as part of the FAR computation, the proposed FAR…would be Code compliant”‘ and “since the existing first and second floor ceiling heights were less than the maximum allowable by the Code, the overall volume of home, as proposed, would not exceed that of Code-compliant homes.”

New hearings were conducted with respect to the amended proposal. The petitioners’ certified real estate appraiser and valuation expert testified that, “the proposed expansion would be esthetically enhancing and insubstantial in light of the surrounding properties….” The expert noted that the ZBA had recently granted “a similar or greater FAR variance to a nearby homeowner…; that the proposal would increase the value of both the petitioners’ home and the adjoining residences; and that it was consistent in terms of size and character with the surrounding community.”

The expert also identified approximately “five nearby comparables,” which contained “FAR overages substantially exceeding the overage proposed by the petitioners.” The petitioners further argued, inter alia, that they could demolish their current residence and build a totally code compliant home which was actually “greater in cubic volume and bulk than their existing home [and] that consideration had been given to a similar Village easement within the context of a prior and greater FAR variance application,” which ultimately had been granted.

Approximately 21 neighboring homeowners expressed support for the application and no community members spoke in opposition to the application.

The ZBA again approved rear yard variances, but denied the requested FAR variance. The ZBA cited, inter alia, “an ‘undesirable change’ in the character of the community” since the proposal would “add…’bulk’ to the home and create a ‘crowded appearance’ in the neighborhood.” The ZBA asserted that “there were no examples of similar variances granted in the immediate area”; that “the variance was substantial since it involved a 184 square foot overage”; “an adverse impact would result, since floor area ratio requirements limit density and allowing a structure in violation of those requirements could damage the unique character of the Village”; and “the petitioners created their own difficulty since they purchased the property with knowledge of the floor area restrictions….”

The petitioners thereafter commenced the subject Article 78 proceeding to nullify the ZBA’s determination.

The ZBA had to consider:

whether: (1) an undesirable change will be produced in the character of the neighborhood, or a detriment to nearby properties will be created, by the granting of the area variance, (2) the benefit sought by the applicant can be achieved by some method, other than an area variance, feasible for the applicant to pursue, (3) the required area variance is substantial, (4) the proposed variance will have an adverse effect or impact on the physical or environmental conditions in the neighborhood or district, and (5) the need for the variance was self-created….

The court noted that:

[c]onclusory findings of fact are insufficient to support a determination by a zoning board of appeals, which is required to clearly set forth “‘how” and “in what manner” the granting of the variance would be improper. …Likewise, a determination will not be deemed rational if it rests entirely on subjective considerations, such as general community opposition, and lacks an objective factual basis….

The court then found that the ZBA’s determination lacked “rational support in the evidentiary record and should be annulled.” Although the ZBA’s determination “generically recounts that the proposed floor area deviation” of approximately 184 feet “would create an undesirable impact in the neighborhood by adding additional ‘massing: and/or “bulk”—which would supposedly create a massing and “crowded appearance,’” such statements were “conclusory and unsubstantiated by reference to relevant supporting hearing facts….”

The ZBA’s assertion as to “an ‘undesirable change in the neighborhood’” was “couched in circuitously qualified language whose precise import is unclear and obscure….” “[A]part from nebulous references to the concept of ‘bulk’ and ‘crowding,’” the ZBA never identified “specifically how the proposed renovations will negatively impact upon the neighborhood and/or why they will create a visually discernable sense of over ‘massing,’ ‘bulk’ or ‘crowding.’”

Additionally, the ZBA had not explained “precisely what these amorphously referenced concepts mean within a residential zoning context.” The petitioners’ expert’s testimony was “essentially uncontroverted at the hearing and supported by the evidence.” The record did not contain evidence of “exactly how the proposal would ‘create a burden on adjoining neighbors’ or why the addition of” approximately 184 square feet or 111 square feet of new floor area, “would constitute a ‘substantial’ deviation in light of all the relevant factors.” The court noted that “every neighboring homeowner who appeared and/or made a written submission to the Board (at least 20), expressed support for the application.” There was “no community opposition” at any of the subject hearings.

The court further noted that although “personal observations of members of the Board may be considered…, the Board’s decision does not disclose or discuss the substance of any personal observations relied upon, or the alleged impact of those observations on the decision ultimately rendered.” Moreover, the record did not substantiate the ZBA’s finding of self-created hardship. Self-created hardship, for zoning purposes, occurs where “an applicant for a variance acquired the property subject to the restrictions from which he or she seeks relief.” Moreover, “self-created hardship is not a determinative factor….” Here, the ZBA based its “self-created hardship” finding on a code provision that referred to the 8,000-foot minimum lot area requirement and contained “no reference to the specific floor area provisions at issue here.” However, prior to the 2011 amendments, the code “exempted attic space from the gross floor to area ratio and provided a 400 square foot FAR exemption for garage space; and…absent these amendments—which were enacted well after the petitioners acquired their home in 2002—the existing home and the proposed alterations…would have been otherwise FAR-compliant.”

Accordingly, the court annulled the ZBA decision and remitted the matter to the ZBA for the issuance of the requested FAR variance.

Leibowitz v. Village of Kensington, 15460/12, NYLJ 1202612019292, at *1 (Sup., NA, Decided June 24, 2013), Winslow, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.