Opinion
1887502
Decided January 15, 2005.
The motion by defendant Leatha Smith for, among other things, distribution of surplus monies from a foreclosure sale and the motion by Yaakob El-Mann and Islam Tazul Bhuiyan, the successful bidders at the foreclosure sale of July 24, 2003, for a return of their contract deposit from the surplus are consolidated for disposition herein and, upon consolidation,
1. The motion by Yaakob El-Mann and Islam Tazul Bhuiyan (the high bidders) is hereby granted and The New York City Department of Finance is hereby directed to return their deposit of $30,000 from the surplus monies herein, and
2. the motion by defendant Leatha Smith is hereby granted to the extent of confirming the Referee's Report of Sale, dated March 30, 2004, and directing him or The New York City Department of Finance to return the balance of the surplus monies, together with interest thereon, if any, to said defendant.
In 2002, plaintiff U.S. Bank, N.A., f/k/a Firstar Bank, N.A., commenced this foreclosure action against defendant Leatha Smith, the mortgagor, among others. Following entry of a judgment of foreclosure and sale on or about April 10, 2003, the subject premises were sold at auction for $300,000. The high bidders deposited $30,000 with the Referee pursuant to the "Terms of Sale," dated July 24, 2003.
A closing was never held between the parties and the Referee elected to retain the contract deposit. On or about February 19, 2004, another auction was held. The successful bidder, RSL Holdings LLC, offered $330,000 and a closing was subsequently held. According to the Referee's Report of Sale, after payment of the judgment and all expenses related to the sale, there was a surplus of $60,149.64. The surplus included the high bidders' $30,000 contract deposit.
In her motion, Leatha Smith, the mortgagor, seeks confirmation of the Report of Sale and distribution of all the surplus monies to her, the owner of the equity of redemption.
No objection has been made to the computation of the Referee or Leatha Smith's status as owner of the equity of redemption; rather, in their motion, the high bidders seek the return of their deposit, explaining that "they were unable to close title due to the fact that the title abstract company raised an exception to the insurability of title;" namely, that Leatha Smith was not personally served with process in this action. They submit "Schedule B" of their title report which states, in part, that title to the premises would be certified subject to the provisions of CPLR 317 and that the insurer "will except any loss, claim or litigation by reason of insufficiency of service on Leatha M. Smith in [the] foreclosure action."
CPLR 317 provides, in part: A person served with a summons other than by personal delivery . . . who does not appear may be allowed to defend the action within one year after he obtains knowledge of entry of the judgment.
In opposition to the high bidders' motion, Leatha Smith points out that the Terms of Sale stated that there were no representations or warranties as to the insurability of the title to the premises. She asserts that the high bidders were not ready, willing and able to close, nor did they request that the title company "waive the exception or attempt to clear the exception." According to said defendant, "[i]t is common and customary in foreclosure proceeding for title companies to include an exception for CPLR 317 and "potential purchasers must exhibit due diligence by reviewing court records to determine if CPLR 317 is applicable." Defendant adds that the Terms of Sale did not state that the Referee would provide title that was insurable without exception, only that title would be marketable.
In reply, the high bidders note that paragraph 8 of the Terms of Sale allowed for the return of their deposit because the Referee was not able to convey insurable and marketable title. They suggest that they would have been obliged to pay any difference between their successful bid at the first auction sale and the highest bid at the second sale, but the second sale produced a bid which was $30,000 higher than their own. Since there was no deficiency, they argue that they are entitled to the full return of their deposit.
Every purchaser of real estate is entitled to a marketable title free from encumbrances and defects, unless he or she expressly stipulates to accept a defective title ( see Laba v. Carey, 29 NY2d 302). A marketable title is one that is free from serious doubt as to its validity and reasonably certain not to be called into question; in short, one that can be sold to a reasonably prudent purchased or mortgaged to a person of reasonable prudence as security for the loan of money (see Regan v. Lanze, 40 NY2d 475). To be marketable, a title need not be absolutely free from every technical or possible suspicion and the mere possibility of a defect that, according to ordinary experience, has no probable basis, does not show an unmarketable title ( Regan, supra). The title to land is unmarketable where it is of such character as to expose the purchaser to the hazard of litigation and where there are outstanding interests of third parties ( see Chesebro v. Moers, 233 New York 75 [1922]). The purchaser of real property at a foreclosure sale has the right to a good, marketable title and he or she should not be left to the uncertainty of a doubtful title or the hazard of a lawsuit ( see Fabricant v. Hyed Realty Corp., 36 Misc 2d 983, modified on other grounds 18 AD2d 995).
The more common practice is not to agree upon conveyance of marketable title since the right to a marketable title arises by implication from the contract, but to provide explicitly that the seller shall give and the purchaser shall accept a title as a reputable title company will approve and insure. Thus, in practice, most parties contract for the transfer of "insurable" title as opposed to "marketable" title ( see 13 Warren's Weed New York Property, § 137.16 [3] at 137-55). An insurable title is not necessarily a marketable one, however, and a purchaser will not be compelled to take insurable title if title is unmarketable and the purchaser is entitled to marketable title (see New York Investors v. Manhattan Beach Bathing Parks Corp., 229 AD2d 593, affd. 256 NY 162). Where title is obtained through a court action or proceeding which was defective, the title may be unmarketable and, thus, where the validity of the service of process on a defendant in a foreclosure action involved doubtful questions of law and fact, title was not marketable ( see Thomas v. Loomis, 273 AD 680).
In this case, under the "Terms of Sale" accepted by Jack Yaakob El-Mann and Islam Tazul Bhuiyan, the plaintiff-seller made no representations with respect to the marketability or insurability of the title to the premises being sold; however, in the event that the Referee was unable to convey marketable title, the purchaser would (pursuant to paragraph "8") be entitled to the return of those sums paid on account of the purchase price (in this case, $30,000). The high bidders' title insurance company would apparently have been willing to insure title if it were permitted to take an exception based upon a potential claim by Leatha Smith that service of process was not personally effected upon her in the foreclosure action. Insurability of the title aside, plaintiff's apparent failure to effect personal service raised the hazard of legal action, thus rendering title unmarketable as far as the high bidders were concerned. That another title company might not have taken such an exception or that another purchaser may have completed the sale is not determinative of what risks the bidders should have assumed. Accordingly, since the high bidders are entitled to a return of their contract deposit, the motion by Yaakob El-Mann and Islam Tazul Bhuiyan is hereby granted and The New York City Department of Finance is hereby directed to return their contract deposit within 20 days after service of a copy of this order with notice of entry.
That branch of the motion by defendant Leatha Smith for an order confirming the Referee's Report of Sale is hereby granted. Her request for monies, plus interest (if any), is hereby granted solely to the extent of directing the Referee or The New York City Department of Finance (whichever is in possession of the remainder of the surplus monies) to distribute the remainder of the surplus to her.
There are no other claimants to the surplus monies, nor any dispute regarding the amount of the contract deposit. There have been no exceptions filed to the Report of Sale, nor do there appear to be any other liens or judgments against the subject premises. Therefore, it is unnecessary to appoint a Referee to ascertain and report the amount due to said defendant.
The foregoing constitutes the decision and order of the Court.
This Order supersedes the prior Order of the court dated January 21, 2005, which prior Order is hereby deemed null and void.