The Docket: N.Y. Court Addresses Case Involving Deed Obtained by Fraudulent Inducement

January 23, 2018

Michael R. O’Donnell and Michael P. Crowley, both of the law firm Riker, Danzig, Scherer, Hyland & Perretti LLP, provided today’s review of a recent decision by the New York Appellate Division (First Department) that involved a deed obtained by fraudulent inducement and the execution of a Consolidated Extension Mortgage Agreement Note. O’Donnell can be reached at modonnell@riker.com and Crowley can be reached at mcrowley@riker.com.

Citation: Weiss v. Phillips, 65 N.Y.S.3d 147 (N.Y. App. Div. 2017).

Facts: In this case before the New York Appellate Division (First Department), defendant Edward Phillips purchased two distressed properties, one of which he transferred to a relative. The two agreed the relative would obtain a mortgage on the property, which Phillips would pay, and would transfer the property back to Phillips at a later date. Four years later, Phillips’s attorney sent a paralegal to obtain the relative’s signature on a blank deed in order to transfer the property back to Phillips. Instead, the paralegal inserted his mother’s name as the grantee on the deed, and the mother later deeded the property to herself and the paralegal. On or about that same date, plaintiff Peter Weiss lent $500,000 to the paralegal and his mother in exchange for a note and mortgage on the property. At this point, the loan obtained by Phillips’s relative remained unpaid, with about $450,000 due. When Phillips learned about the fraudulent transactions, he filed a lawsuit, which was settled when the paralegal and his mother agreed to transfer title on the property back to Phillips. 

After settling the lawsuit, Phillips learned that the loan with Weiss was in default and that Weiss intended to foreclose on the property. Phillips thus executed a Consolidated Extension Mortgage Agreement Note (CEMA) with Weiss through which Phillips acknowledged the validity of Weiss’s loan and mortgage on the property and agreed to waive all defenses and counterclaims in exchange for a one-year extension of the loan. After the year passed, Weiss commenced this action and filed a motion for summary judgment seeking to foreclose. The trial court granted Weiss’s motion over Phillips’s objections, including that the mortgage was unenforceable because it was based on a void deed. 

Holding: On appeal, the New York Appellate Division (First Department) affirmed the trial court’s decision in an opinion authored by Justice Renwick. Among other things, the court held that the deed here was the result of a fraudulent inducement and not a forgery, which made it only voidable rather than void. Further, contrary to Phillips’s arguments, the court held that Weiss was a bona fide encumbrancer due to the CEMA’s provision that Phillips acknowledged and ratified Weiss’s rights under the loan documents and waived any claims or defenses regarding the same. Additionally, the court rejected Phillips’s claim that the CEMA was unconscionable and that he did not understand its terms. Phillips executed it with the advice of counsel, in part because of counsel’s advice that Weiss might have an equitable subrogation claim because purportedly $450,000 of the $500,000 in loan proceeds from his loan were used to discharge Phillips’s relative’s mortgage on the property. The court further found that this was not a typical foreclosure mandating the production of the promissory note tied to the mortgage before the foreclosure could proceed. This was so because Phillips acknowledged Weiss’s right to foreclose in the CEMA and there was no question that Weiss was the holder of the note and mortgage as evidenced by the CEMA and the parties’ deposition testimony. As such, the court held that summary judgment was appropriate. 

Justice Gesmer authored a lengthy concurrence in part and dissent in part. The focus on the dissent was the argument that UCC 3-804 required Weiss to produce the original Note to foreclose or explain how it was lost or destroyed. The dissent also found that the CEMA was ambiguous on whether Phillips was assuming responsibility to pay the mortgage and questioned whether Weiss was a bona fide encumbrancer as he did no investigation into the fraudsters’ creditworthiness or the bona fides of the property.

Relevance to the title industry: This decision is a reminder of the importance of having a party acknowledge the validity of title or a lien in documents resolving title disputes whether those documents take the form of a settlement agreement, a modification or an extension of a mortgage.  Weiss unknowingly made a $500,000 loan secured by a mortgage on a property that the borrowers obtained via fraud. Through the CEMA, however, Weiss ensured that the mortgage was enforceable against the property by his having the property’s “true” owner be a party to the CEMA and acknowledge the mortgage lien. Additionally, the decision reemphasizes the importance of the doctrine of equitable subrogation to lenders or title insurance companies which, according to Phillips’s attorney, was part of the reason Phillips agreed to execute the CEMA and ratify the mortgage.


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