Scott E. Mollen ()
Option to Purchase Property Contained Sufficient Material Terms—Option Contracts Need Not be Notarized or Acknowledged—Tenant’s Motion for Summary Judgment Denied on the Grounds that There Were Issues of Fact as to Whether the Option was Forgery, Including Whether a Signatory to the Option Had Actual or Apparent Authority
Property was subleased by “A’s” entity from “B.” “A” was a guarantor of the subtenant’s obligations. “A” alleged that “B,” as further consideration for the sublease, granted “A” “a written option to purchase the Property for $16 million” (option). However, “A” alleged that “B” “would not confirm the validity of the [Option] grant or the exercise thereof when ['A'] sought to exercise the Option….” “A” thereafter commenced the subject action against “B.” “A” sought a declaratory judgment declaring that the Option and the exercise thereof was valid and enforceable, specific performance of the Option to Purchase and costs and disbursements.
“B” asserted as affirmative defenses, that “B” did not own the property, that neither defendant nor any authorized agent of the defendant ever executed the option in favor “A,” the parties never executed a writing which met the requirements of the New York Statute of Frauds (SOF) and the plaintiff failed to state a cause of action upon which relief may be granted.
“A” produced a copy of the one-page, handwritten option. It stated:
“I, Norman_____hereby represent that I am authorized to offer ['A'] the option to buy [the property] for $16 mm for 5 years with 5 percent increases after 3 years starting___________”
The option concluded with the signature of “C,” “next to an ‘X’ at the bottom of the page, with a notary stamp and signature by [the notary], without a jurat, but with a date which is hard to read but seems to say ‘March 10, 2010.’”
“B” moved for summary judgment dismissing the complaint. “B” argued that “A” had “failed to produce a valid written contract with [d]efendant memorializing an agreement for the [option].” “B” asserted that “‘[t]he sheet of paper’ plaintiff produced as the option…’is at best a handwritten paper which lacks facts or any specific information relating to the [Property] and mandatory terms of the agreement.’”
“B” proffered affirmations by two people, one of whom had signed the option, which challenged the validity and authenticity of the option. “B” contended that “A’s” neighbor (notary), had “improperly notarized the Option…outside the presence of the alleged signatory….” “C” affirmed that he had “never appeared before any notary and signed [his] name to the purported option.” “B” contended that the signature on the option agreement was a forgery based on the signatory’s assertion that he had “never signed such an option agreement on behalf of [d]efendant or individually.” “C” claimed that “A” had “‘created’ the Option.”
“B” also argued that “C” had “lacked actual authority to offer or execute the Option…on ['B''s] behalf.” A managing member of “B’s” LLC, asserted that he approves “any business decisions relating to commercial and/or residential transactions [and] I am unaware that [d]efendant or any authorized agent entered into an option agreement with [p]laintiff.” “C” also asserted that he is “B’s” employee and he is “not permitted to make any independent decisions in relation to the operation and/or management of the [Property]. All matters must be approved by [the managing member].”
“A” countered that “B’s” summary judgment motion “was made ‘prior to the close of discovery.’” “A” argued that he was unable to depose at least five relevant witnesses, including “his neighbor [the notary],…, who would purportedly testify that ['C'] had signed the handwritten option agreement in his presence.”
“A” further argued that factual issues preclude granting summary judgment, including whether “C” actually executed the option. Thus, the managing member of “B’s” LLC claimed he was “unfamiliar with the signature on the document” and “C” denied that he even signed the option, claiming that “it was ‘created by [p]laintiff.’” “A’s” opposing affidavit, alleged that “C” “executed both the sublease and the Option…in his presence.”
The court stated that “A’s” testimony was “supported by copies of the sublease and the option…in the record, which reflect nearly identical signatures by ['C']. In contrast, ['C''s] affirmation contains a very different, truncated signature.” The court opined that the option, if proven to have been signed by ['C'], “contains all the terms necessary to constitute an enforceable option.” The court explained that the SOF is applicable and it was “satisfied by the document proffered by plaintiff.”
The property was “identified, a price [was] specified, the price to increase yearly at 5 percent if not exercised within three years, and the term of the option [was] specified to be five years.” The plaintiff had alleged that the option agreement was signed in 2010 and thus, it had not expired when the plaintiff attempted to exercise it. Moreover, the date written by the notary, “may be more legible on the original than on the copy in the papers, or it may be ascertainable once depositions have been held.” The court stated that “[p]arol evidence to clarify the date of execution is permissible.” Additionally, the court noted that “that there is no requirement in the statutes or the case law that an option contract be notarized or acknowledged.”
The court concluded that there were “triable factual issues that preclude granting summary judgment,” e.g., whether or not “C” actually executed the option on “B’s” behalf or is it a forgery and whether “C” had “actual or apparent authority” to execute the option on “B’s” behalf. Additionally, “[c]onspicuously missing from this record are ['B''s] organizational documents and/or business records to establish the identity of ['B''s] managing members, employees and authorized agents at the time the Option…was allegedly executed.”
Comment: Some people are surprised when they see that a substantial real estate transaction was seemingly handled in a relatively informal manner. Experienced real estate practitioners are not as surprised when they see a handwritten agreement that may or may not have been drafted or reviewed by an attorney. While such informality is not common in substantial transactions, it does occasionally occur.
Generally, property owners do not like to give options to purchase. They certainly do not like to give options that last for several years. Even the most successful real estate owners would concede that macro and micro economic factors, local market values, interest rates and the availability of financing are often difficult to predict for a five-year period.
Since an option to purchase may have been extremely important to the parties, they should consult with counsel to make sure that such agreement embodies the material terms in clear language that addresses not only the terms of the purchase, but also details as to how the option could be exercised. This is particularly important since case law holds that an exercise of an option must strictly comply with the terms of the option agreement.
An option to purchase is an encumbrance that could “complicate” life for the owner with respect to financing, leasing and/or selling its property. When an owner does give a tenant an option to purchase, it is often because it is necessary to make a deal. Maybe the market was weak at the time of the transaction. Maybe a property’s location, size, configuration or permitted use made the property difficult to lease.
Chan v. Driggs 808, 17238/12, NYLJ 1202632258047, at *1 (Sup., KI, Decided Dec. 3, 2013), Silber, J.
Foreclosures—Homeowner Alleged That Lender Was On Notice of Alleged Fraudulent Scheme—Mortgage Electronic Registration Systems, Inc. (MERS)—Expired Notice of Pendency Cannot be Revived
This case involved the issue of “whether a mortgage lender can ignore signs of a ‘”foreclosure rescue’ scheme simply because the title to the…property appears to be in order.” Defendants MERS and a lender (lender) had moved for summary judgment dismissing the complaint. The complaint sought, inter alia, “to quiet title.” The Appellate Division, First Dep’t (court) held that since the defendants’ evidence was not in admissible form, they failed “to establish prima facie that they are bona fide encumbrancers.” Moreover, the plaintiff raised “triable issues of fact as to defendants’ notice of the alleged fraud.” The court also stated that discovery had not been completed and “plaintiff may be able to raise additional issues of fact” upon acquiring additional evidence “that remains in defendants’ exclusive possession.” Accordingly, the court affirmed the trial court’s denial of the defendants’ motion to dismiss. However, the court held that the trial court decision had “improperly granted plaintiff’s cross motion to extend her notice of pendency” since “an expired notice of pendency cannot be revived.”
The plaintiff and her mother had owned their home until September 2004, “when a tax lien of more than $23,000 was recorded against the property.” The plaintiff was thereafter approached by a neighbor, who said she “knew someone who could help.” The neighbor introduced the plaintiff to defendant “A.” “A” persuaded the plaintiff to transfer ownership of the property to her. The plaintiff alleged that she thought that she was “merely acquiring a loan to help her pay the tax arrears and improve her credit….” The plaintiff had instead conveyed title to “A” in September 2005. The transfer was recorded in the Office of the City Register in June 2006.
The plaintiff made monthly mortgage payments to “A” until she “unexpectedly received mail addressed to defendant ['B'], followed by foreclosure papers. Unbeknownst to plaintiff, ['A'] had conveyed title to ['B'].” “B” “apparently had no intention of purchasing a house.” The plaintiff alleged that “B” was a “‘straw buyer’ in the scam.” At the closing of the sale to “B,” “B” applied for and obtained a loan from the lender for the entire purchase price of $500,000. The lender acquired a purchase money mortgage on the property. MERS was named on the mortgage as the lender’s nominee and the mortgagee for purposes of the recording.
“B’s” deposition testimony indicated that “even he may have been a victim of the scheme, since he was unwittingly coerced into purchasing plaintiff’s house with a loan he claimed he could not afford.” At least one representative of the lender attended “B’s” closing, in addition to “A” and several other defendants. “B” had never met anyone from the lender “and did not fully understand that he was purchasing a home.” “B” had not even seen the home before closing and was unaware that the plaintiff was living there. “B” believed that “A” and others, “for some unexplained reason,” were “helping him ‘sign for’ a house despite his repeated statements that he did not earn enough money to pay a mortgage.”
An appraisal of the plaintiff’s home, that was provided at “B’s” closing, “was rife with errors indicative of fraud.” The “appraiser significantly reduced the square footage of comparable properties as a means to inflate the value of plaintiff’s house.” The lender recognized such errors, and “its employee-reviewer noted that ‘the estimated value d[id] not appear to be supported’ by the appraisal.” The lender thereafter reduced the loan amount from $580,000 to $500,000 before approving “B’s” loan.
“B” signed the lender’s loan application for the first time at the closing. Although “B’s” application stated that he earned $10,500 per month, the lender’s loan file lacked proof of “B’s” income or credit history. There was no indication that the lender had “requested or examined ['B''s] paystubs, tax returns, or credit report.” The lender nevertheless approved a loan to “B” in the amount of $500,000.
In 2007, after the lender filed a foreclosure action against “B,” the plaintiff commenced the subject action, asserting claims for, inter alia, equitable mortgage, relief pursuant to Art. 15 of the New York Real Property Actions and Proceedings Law to quiet title, and Real Property Law (RPL) §329, to have “A” and “B’s” deeds and the defendants’ mortgage declared void. While discovery was underway, the defendants moved for summary judgment, “arguing that [the lender] was a good faith encumbrancer for value and…, therefore, they maintained a valid mortgage on the subject property.”
The trial court found that there were material issues of facts related to the lender’s “actual or constructive knowledge of the fraudulent transfer to “A” and the conveyance to “B.” The trial court removed a stay of discovery that had been triggered by the defendants’ summary judgment motion and extended the duration of the plaintiff’s notice of pendency, which had expired nearly a year earlier.
The Appellate Division ex-plained:
The rights of an encumbrancer for value are protected “unless it appears that [the encumbrancer] had previous notice of the fraudulent intent of [its] immediate grantor, or of the fraud rendering void the title of such grantor” (Real Property Law §266;…. A mortgagee will be charged with constructive notice if it is “aware of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue”…. If a “reasonable inquiry” would reveal some evidence of fraud, then failure to “make some investigation” will divest the mortgagee of bona fide encumbrancer status….
A mortgagee may make a prima facie showing that it is a bona fide encumbrancer by presenting a title search showing a clear chain of title…. To raise an issue of fact in response, the opposing party must offer evidence to justify requiring the mortgagee to engage in an inquiry regarding title or fraud (see id.), for example, evidence that the moving party possessed documents indicating that the opposing party was in possession of the property….
The court found that the defendants “failed to make a prima facie showing that they [were] entitled to bona fide encumbrancer status because their proffered title search was neither an official search nor ‘certified’ by the searching company….” Although the party opposing summary judgment may “demonstrate acceptable excuse for…failure to meet the strict requirement of tender in admissible form,…the movant is not accorded that luxury; its evidence must be in admissible form….” Since the defendants’ title search was not in admissible form, the court did not consider it as evidence that the lender was a bona fide encumbrancer.
Even if the defendants were bona fide encumbrancers, they would not have been entitled to summary judgment since the plaintiff had come forward with evidence that “defendants had notice of the underlying fraud.” The court emphasized that (a) “B” applied for the loan for the first time at his closing, (b) “B” was a buyer who had no intention of purchasing a home and “appears to have been coerced into attending the closing—without any proof that he had an ability to repay it” and (c) there was no evidence that the lender had examined “B’s” “paystubs, tax returns, or credit history before approving his loan application.” The court opined that “[t]hese suspicious aspects of the transaction present issues of fact pertaining to [the lender's] knowledge of the foreclosure rescue scam.”
Additionally, the “faulty appraisal” raised “an inference that [the lender] had notice of the underlying fraud.” Although the lender had reduced the loan amount, “the fact that the initial appraisal was overstated would lead a reasonably prudent lender to investigate further to determine whether the prospective borrower was involved in a transaction free of fraud.” Had the lender conducted a reasonable inquiry into the legitimacy of the sale by “A” to “B,” “it could have discovered plaintiff’s competing claim.” Thus, the court declined to grant summary judgment to the defendants.
Additionally, “there may be evidence in the [defendants'] exclusive possession that would enable plaintiff to present other triable issues of fact.” The plaintiff had served interrogatories requesting the names of employees who were involved in the “B” closing and those interrogatories remained unanswered. Also, the plaintiff “would likely seek to depose any of [lender's] employees who approved ['B''s] loan.” The plaintiff had also demanded production of documents relating to the lender’s underwriting policies and involvement in the “B” closing. Those documents had not been produced.
The court noted that “the underwriting policies would be elucidative of whether [the lender] would customarily approve a $500,000 loan without verifying the intended borrower’s financial condition. If [the lender] would ordinarily deny such a loan application, then its approval of the loan to ['B'] would indicate that it had at least an inkling that the conveyance was illegitimate.”
Moreover, even if the lender lacked knowledge of the plaintiff’s particular claim to the property, “the presence of fraud alone—even absent knowledge of the ultimate victim’s identity—ought to counsel a lender against proceeding with a transaction without conducting a reasonable inquiry.” “If [the lender] had actual or constructive knowledge that the ['B'] closing was blighted by fraud, its knowledge would be enough to render the protection of [RPL] §266 inapplicable.” Thus, the court found that, at the very least, the plaintiff should be entitled to complete discovery.
The court then held that the trial court lacked authority to extend the plaintiff’s notice of pendency, since the plaintiff had not moved for an extension until after the notice had expired.
Comment: The court had also observed that “[f]oreclosure rescue scams,…are often perpetrated by self-described ‘experts’ who prey upon vulnerable homeowners as foreclosure looms” and that the foreclosure rate for the New York and New Jersey region “hovers around eight percent, double the national average.”
Miller-Francis v. Smith-Jackson, 1805/07, NYLJ 1202629685221, at *1 (App. Div., 1st, Decided Nov. 21, 2013), Before: Gonzalez, P.J., Mazzarelli, Acosta, Renwick, JJ. Opinion by Acosta, J. All concur.
Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.