Goldstein v. Gold

OPINION OF THE COURT Titone, J. P. In this action brought to set aside a fraudulently obtained satisfaction of mortgage, Paul Adler, the intervening defendant who purchased the property encumbered by the mortgage, appeals from stated portions of a judgment of the Supreme Court, Queens County, which, among other things, canceled the satisfaction and declared the mortgage to be a valid lien. Analysis of the priorities mandated by the recording acts persuades a majority of this court to conclude that the intervening defendant is bound by a notice of pendency filed prior to the recording of his deed and the satisfaction piece and that there is no basis to invoke an estoppel against the plaintiff. The loss should fall where it belongs — on a negligent title company. Therefore, we affirm the judgment insofar as appealed from. [101] The underlying facts illustrate the ensnaring “tangled web we weave * * * [w]hen first we practice to deceive” (Sir Walter Scott, Marmion, Canto VI, Stanza 17). In 1979, plaintiff Goldstein loaned to his stepmother, defendant Frances Gold, some $22,000, securing the loan by a recorded mortgage on real property which she owned. Two years later, Ms. Gold requested that plaintiff sign a satisfaction of mortgage as she desired to sell the property. Contrary to his stepmother’s representations, however, a purchaser had already been found and a closing date set. When Ms. Gold refused to return the satisfaction piece, plaintiff commenced this action and duly filed a notice of pendency in the Queens County Clerk’s office. It appears that the closing on the property took place about an hour prior to the filing of the notice of pendency. At that time, the satisfaction of mortgage was exhibited to the representative of the title insurance company who, without taking an escrow or other security pending its recording, simply marked the lien off the company’s exception sheet. The satisfaction piece and deed to Paul Adler, the purchaser and intervening defendant, were, of course, recorded subsequent to the notice of pendency. While Ms. Gold initially appeared in the action, filing an answer and conceding that no payments had ever been made to the plaintiff, she defaulted at the time of trial. The purchaser, who had intervened, urged, however, that the mortgage should be deemed satisfied insofar as his interests were concerned. Trial Term disagreed, as do we, though not for the reasons expressed at nisi prius. We are all in agreement that a fraudulently obtained satisfaction of mortgage may be set aside and the mortgage restored as a valid lien (Vohmann v Michel, 185 NY 420; Waterman v Webster, 108 NY 157; Fassett v Smith, 23 NY 252; Weaver v Edwards, 39 Hun 233, affd 121 NY 653; Headley v Goundry, 41 Barb 279; 5 Tiffany, The Law of Real Property [3d ed], § 1493). In light of the stepmother’s admission, it is equally plain that the elements of fraud have been established (Weaver v Edwards, supra; Waterman v Webster, supra; Fassett v Smith, supra; 5 Tiffany, The Law of Real Property [3d ed], § 1493). The question, then, is whether this determination is binding on the purchaser. The majority concludes that, by virtue of the recording acts, it is. New York has a so-called “race-notice” recording statutory scheme (Real Property Law, § 291; 4 American Law of Property [1952 ed], § 17.5; 4A Warren’s Weed, New York Real Property, Recording, §§ 1.01,1.03,1.04). In other words, in order to cut off a prior lien, such as a mortgage, the purchaser must have no [102] knowledge of the outstanding lien and win the race to the recording office (6A Powell, Real Property, par 905 [1]; 4A Warren’s Weed, New York Real Property, Recording, § 1.04). Adler loses on both counts. When, as here, a notice of pendency is filed, a purchaser is charged with constructive notice of litigation if he fails to record the deed prior to the filing of the notice of pendency. “A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as if he were a party” (CPLR 6501; see Grid Realty Corp. v Winokur, 43 NY2d 956; Corporation of Presiding Bishop of Church of Jesus Christ of Latter-Day Sts. v Solow Bldg. Corp., 52 AD2d 533, 534; 4 American Law of Property [1952 ed], § 17.9). That the purchaser lacks actual knowledge of the filing is irrelevant as the principle underlying the doctrine of notice of pendency “does not rest upon the presumption of notice but upon reasons of public policy, manifested by the language of the section” (Kestler v Weissenfels, 247 App Div 888, 889). By merely filing a notice of pendency, the “world [is put] on notice of the plaintiff’s potential rights in the action and * * * warning all comers that if they then buy the realty * * * or otherwise rely on defendant’s right, they do so subject to whatever the action may establish as the plaintiff’s right” (Siegel, NY Prac, § 334, p 408; see, also, 13 Carmody-Wait 2d, NY Prac, § 87:73; Osborne, Mortgages [2d ed], § 222, p 436). Perceived equities in favor of a purchaser are thus of no moment. The purchaser stands in the shoes of the vendor and can obtain no better title than the vendor (Grid Realty Corp. v Winokur, supra, p 957; Marden v Dorthy, 160 NY 39, 60; Crocker v Lewis, 144 NY 140, 142-143; Levine v Carr, 33 Misc 2d 425, 426; 13 Carmody-Wait 2d, NY Prac, § 87:75). In other words, the purchaser’s “good faith” is not pertinent; at issue is the vendor’s acts vis-a-vis the plaintiff filing the notice of pendency, not the purchaser’s rights (see Lawrence v Conklin, 17 Hun 228; 4 American Law of Property [1952 ed], § 17.9). We are cited to no authority which would permit a purchaser to abrogate these principles simply by electing to intervene in the underlying action and our independent research fails to disclose any. This is not to say, however, that such equities would not be relevant, or even controlling, in other circumstances, such as where no notice of pendency is filed or the satisfaction is recorded prior to the closing (see Wittenbrock v Parker, 102 Cal 93; McConnell v American Nat. Bank, 59 Ind App 319, 324; Heyder v Excelsior Bldg. Loan Assn., 42 NJ Eq 403; Ann., 35 ALR2d 948, 956, § 6; cf. Cornell v Maltby, 165 NY 557). As put by the New [103] Jersey court in Heyder, when “through [a mortgagee’s] negligence, the record is permitted to give notice to the world that his claim is satisfied, he cannot, in the face of his own [negligence], have his mortgage enforced against a bona fide purchaser, taking his title on the faith that the registry is discharged” (Heyder v Excelsior Bldg. Loan Assn., supra, p 408). In Heyder (supra) and every other case we have found “the mortgagee [was] * * * responsible for the mortgage being released of record” (McConnell v American Nat. Bank, 59 Ind App 319, 324, supra; emphasis supplied; see, also, Wittenbrock v Parker, supra; Knickmeier v Fleer, 185 SW2d 57, 61 [Mo App]; Peek v Wachovia Bank & Trust Co., 242 NC 1,19; 5 Tiffany, The Law of Real Property [3d ed], § 1493; 59 CJS, Mortgages, § 282, subd d, p 353) and application of an estoppel was consistent with maintaining the integrity of the recording act. We decline the invitation to extend these authorities to situations in which reliance is placed on an unrecorded instrument and the purchaser loses the race to the recording office (see 4 American Law of Property [1952 ed], § 17.9; 4A Warren’s Weed, New York Real Property, Recording, § 1.04). To do so would, in the majority’s view, judicially transform our “race-notice” recording statute to a pure “notice” statute (see Casner & Leach, Cases and Text on Property [2d ed], p 806; 6A Powell, Real Property, par 905). In short, because Adler did not rely on a recorded document, the race-notice aspect of our recording statute precludes him from becoming a bona fide purchaser for value and, therefore, he cannot cut off the prior mortgagee (see Marden v Dorthy, supra). Moreover, the fault in this case rests squarely on the shoulders of the title insurance company. Its search revealed plaintiff’s mortgage and, as indicated, in order for it to obtain the protections of the recording act for its insured, the satisfaction would have had to have been recorded (see Real Property Law, §§ 291, 321; cf. Andy Assoc, v Bankers Trust Co., 49 NY2d 13, 22; Lamed v Donovan, 84 Hun 533, affd 155 NY 341; Bacon v Van Schoonhoven, 87 NY 446). The dissent’s protestation that a continuation search would have been fruitless misses the mark. Lack of knowledge is only the first hurdle which must be met under a race-notice recording act. The purchaser still must win the race to the recording office. Consequently, the title insurance company should have held the mortgage money in escrow or delayed the closing until the satisfaction had been recorded or required the mortgagee to appear at the closing, all standard practices (2 Harvey, Law of Real Property and Title Closing, §§ 583, 583.01) which are [104] particularly “important [to follow] when the original mortgagee is a private person, as distinguished from an institutional lender” (2 Harvey, op. cit., § 583.01). Due to its negligence in failing to do so, the title company, in accordance with its contractual obligation to the purchaser under the title policy, will ultimately bear the loss. For the reasons stated, the judgment should be affirmed insofar as appealed from, with costs.