Court: District Court, E.D. New York; May 20, 1983; Federal District Court
Manuel J. Price, Bankruptcy Judge, presides over an adversary proceeding initiated by Rego Crescent Corp. ("the Debtor") against Flagship Air Service Transfer, Inc. ("Flagship") regarding a contract for the sale of land dated October 6, 1980. Flagship's counterclaim asserts that it rejected the title offered by the Debtor because it was uninsurable under the contract's terms, seeking a return of its $5,000 deposit plus costs for a survey and title search. The Debtor filed for Chapter 11 bankruptcy on December 19, 1979, and, with the approval of its unsecured creditors’ committee and the court, was authorized to pursue this action on February 17, 1982.
The contract stipulates a sale price of $65,000, with payments structured as $5,000 upon signing, $16,750 at deed delivery, and $43,250 via a purchase money bond and mortgage. It mandates that the purchaser employ U.S. Life Title Co. to examine and insure the title, and requires the seller to provide a title that the title company would approve. The property is sold subject to existing zoning regulations and certain encroachments.
In terms of liability, the contract limits the seller's obligations to refunding the purchase price and covering the net costs of title examination and survey, with the contract considered canceled upon these payments. Originally set for closing on December 3, 1980, the date was postponed due to the City of New York taking title to the property for unpaid taxes, requiring redemption through the Board of Estimate, which faced processing delays. Both parties' attorneys agreed to the postponements.
On March 15, 1981, Michael Rose, representing the defendant, notified I. Louis Winokur, the debtor's attorney, that the transaction must close promptly, setting a closing date for June 8, 1981, and making time of the essence. Winokur replied on May 21, 1981, indicating that the Board of Estimate would discuss the property application on May 28, and requested to postpone the closing to June 21 to allow time for tax payments and to obtain a court order to cancel a foreclosure judgment. Following this, the closing was postponed to July 8 and then to July 27, 1981, due to concerns raised by Richard Lofrese, a vice president of Flagship, regarding a newly discovered asphalt driveway patch at the property.
Before the July 27 closing, Winokur requested to adjourn to August 10, 1981, to review a new survey completed for the title company. On August 10, the parties met, but Rose refused to close, citing two main reasons: non-compliance with the contract terms regarding title insurance by U.S. Life Title Insurance Co. and the substitution of a consolidated mortgage for a new purchase money mortgage. Rose argued that the title insurance was inadequate due to issues revealed in a July 20, 1981 survey, which indicated multiple encroachments and irregular structures on the property, including garage eaves and fences. The survey also highlighted a portion of an asphalt driveway patch straddling both the debtor’s property and the adjacent property, further complicating the closing proceedings.
The survey indicates that the length of the patch is estimated to be between 12 and 16 feet. The Certificate and Report of Title from U.S. Life Title Insurance Co. confirms that Rego Crescent Corp. can convey a good and marketable title to the premises, subject to specified liens and encumbrances. Schedule B details exceptions to the title insurance coverage that must be resolved prior to closing. An amendment to Schedule B, dated August 10, 1981, notes survey findings, including an irregular wood fence and potential encroachments from a neighboring property’s garage. At closing, disputes arose over the inclusion of these exceptions. Testimony revealed that the title agent, Mr. Lupoli, contacted his office about omitting exceptions but was instructed not to do so, leading to Rose's refusal to close. Further testimony from Harry J. Bernstein indicated a handwritten note regarding an asphalt driveway patch was added to the exceptions. Despite Rose's objections, Bernstein claimed U.S. Life would insure the title regardless of these exceptions, but clarified that an exception excludes coverage from the title insurance.
Exception No. 5 has been amended according to Defendant’s Exhibit C, as confirmed by witness Mr. Bernstein. However, Bernstein expressed that the amendment does not imply agreement to the terms outlined in the insurance policy. He acknowledged that typically, an exception means that the insurer would not cover those aspects, although he maintained that Exception 5 should not be considered a true exception to the policy. When questioned about a hypothetical claim involving an encroaching vehicle, Bernstein initially stated that if it were an exception, the insurer would pay, but quickly corrected himself to say any claim would require consideration by claims counsel and he did not have the final decision-making authority.
Rego Crescent’s attorney, I. Louis Winokur, testified as an expert, indicating that the details on the survey of the Rockaway Boulevard property did not present valid objections to title and were not substantial enough to interfere with the use of the premises. Additionally, Rose, another party involved, explained that the reason for not closing the sale was that the mortgage prepared by Winokur was not the purchase money mortgage specified in the contract. Rose highlighted that they were expecting a lien-free title and had concerns about the mortgage, including the fact that a party with an interest in it was deceased. He emphasized that he was unaware of the consolidated mortgage being proposed at the closing and had no knowledge of the original mortgage's terms or parties involved, noting prior issues with the consolidated mortgage from a previous transaction involving Flagship.
Winokur did not present the required purchase money mortgage at closing, instead possessing an assignment of an existing mortgage and preparing a new mortgage for $25,750. This new mortgage consolidated existing interests totaling $43,250, with payments set at $2,637.47, including a 12% interest rate, extending payment for 18 months from August 10, 1981. Winokur expressed willingness to satisfy existing mortgages and issue a new purchase money mortgage if requested by the purchaser.
There was conflicting testimony regarding whether Winokur offered to provide satisfactions of the mortgages on the closing date. Rose indicated that Winokur suggested postponing to obtain them, while Winokur asserted he was ready to satisfy the mortgage and that any postponement was related to other conditions from Rose or U.S. Life. The closing date transcript revealed ambiguity in Winokur's offers concerning the mortgages.
It is undisputed that Rose provided the necessary funds at closing and had previously deposited $5,000 along with payments for a title search and property survey. The plaintiff claims it demonstrated it offered an insurable title to the defendant per the contract terms, arguing that exceptions noted in the Title Report and related correspondence were either minor or not valid exceptions to insurance coverage.
The case of Laba v. Carey, 29 N.Y.2d 302 (1971), serves as a pivotal reference in New York law for interpreting "insurable title" clauses in real estate contracts. The Court of Appeals established that a seller commits a breach if a title company refuses to unconditionally insure the title. This principle has been consistently upheld in subsequent cases, such as Kopp v. Barnes and Beacher v. Madera, reinforcing that a purchaser is not obligated to accept a title insurance policy with exceptions not specified in the sale contract.
In Beinhauer v. Morris, a closely related case, the court ruled that the seller was not entitled to specific performance because the contract required the seller to convey a title that could be insured by one of the specified title companies. The findings revealed that minor encroachments on the property prevented the insurance companies from providing unqualified insurance, which meant that the title did not meet the contractual requirements.
The court emphasized that the agreement required not only a marketable title but also one that could be insured without conditions. The ruling in Laba v. Carey clarified that it was permissible for a title insurance policy to include specific exceptions if the contract of sale explicitly anticipated those exceptions. The relevant exceptions included covenants and easements, provided they were not violated, and any conditions revealed by an accurate survey, as long as they did not affect the marketability of the title.
In the case of Laba, a title search after the execution of a sales contract revealed the land was encumbered by a telephone easement and a "Waiver of Legal Grades" covenant requiring the property owner to install a sidewalk of legal grade as directed by the city. The title company agreed to insure the title only with these encumbrances specifically excluded from coverage. As a result, the purchasers rejected the deed tender, asserting the seller could not provide a good, marketable, and insurable title. The court noted that the title company’s approval must be unequivocal unless exceptions were anticipated by the contract, which in this case, the exceptions were indeed provided for. Therefore, the court held that the purchasers should have accepted the deed tender. The overarching principle is that purchasers should not be obligated to accept a title fraught with potential litigation or that is not insurable. The plaintiff cited several cases to support their position, but these were deemed inapplicable as they addressed different issues regarding marketable versus insurable title. The court clarified that a covenant to provide a title acceptable to the title company differs from providing a title free from valid legal objections. The cited cases regarding minor encroachments and specific performance were also found irrelevant, as they pertained to marketable title rather than insurable title, which was the critical issue in this case.
The seller was obligated to provide a title that could be approved and insured by either of two specified title insurance companies. The title report indicated that the title was subject to rights concerning the natural flow of a brook on the property, yet the court ruled that this did not constitute an easement or defect in the title, as previously determined by the New York State Court of Appeals. In contrast, the current case involved actual or potential easements and encroachments, reinforcing the need for an insurance policy free of defects or encumbrances that could affect marketability.
Testimony from Mr. Bernstein indicated that he would have provided insurance despite raised exceptions, but he also acknowledged that any claim regarding adverse possession would require legal consultation, implying that coverage was not unconditional. The plaintiff argued that a simple inquiry could clarify the legality of an asphalt driveway patch on the property, but the contract mandated that all risks be insured against by the title company. The title company could have conducted an investigation or relied on the information provided and issued insurance without exceptions.
The plaintiff suggested that the defendant was seeking to evade its contractual obligations. However, there was no evidence in the record to support this claim, and regardless of the defendant's motives, the plaintiff remained responsible for delivering an insurable title per the contract terms.
The purchaser may negotiate to accept property with certain easements or encroachments but is not obligated to accept less than what was agreed upon. In this case, the contract specified limitations on the property, which did not include minor encroachments or potential adverse possession related to a driveway patch. Therefore, these exceptions were not anticipated in the contract, and since the plaintiff failed to provide a title insured by U.S. Life as stipulated, Rego Crescent breached the agreement and is not entitled to specific performance. The judgment favors the defendant, who is entitled to a return of a $5,000 deposit, $100 for the title search, and $200 for the survey based on the counterclaim. The court does not need to address whether Rego Crescent also breached by not providing the required mortgage. A judgment will be settled accordingly within ten days.
