Did Your Borrower Own The Mortgaged Property? – It Really Does Matter

This issue relates to the origination of mortgages, but when servicers encounter it later it will have real meaning.

A recent case [Solar Line, Universal Great Brotherhood, Inc. v. Prado, 100 A.D.3d 862, 955 N.Y.S.2d 96 (2d 96 (2d Dept. 2012)] reminds us of the controlling principle worthy of review:  A void deed gives no title so that a later mortgage upon that property is likewise void.

This is a point that is sometimes misunderstood and so has been addressed in previous alerts over the years.  There is a different outcome resulting from a deed which is void, as opposed to one which is voidable.  If the deed was absolutely no good at the inception (void) – such as if it were forged – then a mortgage on that property can have no validity.  If, however, the deed is voidable, that is, it may later be set aside, the lender as to that property, if it had no knowledge of any infirmity, can be protected.

The new case presents an interesting practical example of the concept.  Here, property was owned by a not-for-profit corporation.  One Valdemar Prado conveyed this property to himself via a deed he executed.  He then obtained a mortgage on that property from a lender.

But the Not-For-Profit Corporations Law (§s 5, 10 and 11) requires that the Supreme Court approve the disposition of all or substantially all of the assets of a not-for-profit corporation.  No such court order was obtained in this instance.  Not being in compliance with the law, the deed was therefore void.

In so declaring, the court recited the maxim that “if documents purportedly conveying a property interest are void, they convey nothing and a subsequent bona fide purchaser or a bona fide encumbrancer for value (here the lender) receives nothing.” (Parenthetical material supplied.)

Related to this issue, as mentioned, is the argument made in this case by the lender that it was a subsequent good faith encumbrancer for value and therefore protected under New York’s Real Property Law §266.  However, as the court pointed out, a bona fide encumbrancer is only protected when the challenged conveyance is “voidable, not when it is void”¹ (see Anderson v. Blood, 152 N.Y. 285, 46 N.E. 493; Yin Wu v. Wu, 288 A.D.2d at 105, 733 N.Y.S.2d 45; Kraker v. Roll, 100 A.D.2d 424, 474 N.Y.S.2d 527).  So, because it was determined that the deed was void, the lender’s interest could not be protected under Real Property Law §266.

Just to complete the story, the lender argued that Religious Corporation Law §12(9) allows a court to later ratify a conveyance.  True enough ruled the court, but that statute applies only to a religious corporation and what was before it at this time was a not-for-profit corporation.  The lender loses and it all confirms one obvious concept, that a lender must be certain of the validity of title of its prospective borrower.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.