L. Smirlock Realty Corp. v. Title Guarantee Co.

• Decision Date: 28 November 1983
• Citation: 97 A.D.2d 208,469 N.Y.S.2d 415
• Parties: L. SMIRLOCK REALTY CORP., Respondent-Appellant, v. The TITLE GUARANTEE COMPANY, Appellant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 415

469 N.Y.S.2d 415

97 A.D.2d 208

L. SMIRLOCK REALTY CORP., Respondent-Appellant, v. The TITLE GUARANTEE COMPANY, Appellant-Respondent.

Supreme Court, Appellate Division,

Second Department.

Nov. 28, 1983.

Permut & Boyle, New York City (John J. Boyle and Michael Permut, New York City, of counsel), for appellant-respondent.

Suozzi, English & Cianciulli, P.C., Mineola, for respondent-appellant.

Ruskin & Gyory, New York City (Richard Gyory and Herbert B. Ruskin, New York City, of counsel), for the N.Y. State Land Title Ass'n, amicus curiae.

Before LAZER, J.P., and GIBBONS, THOMPSON and WEINSTEIN, JJ.

GIBBONS, Justice.

We are called on in these appeals to review several questions pertaining to the determination and measure of damages recoverable by a fee holder in a suit on a

policy of title insurance. Of particular importance is the measure of damage in a situation where there has been a partial failure of the insured's title. Related matters include the date which should be used for the purpose of computing the value of any loss, whether improvements to the property made subsequent to the policy's execution should be taken into account, and the propriety of the trial court's award of interest. Finally, there is the question of the insurer's right of subrogation to a mortgage where the insurer has paid to the fee holder's mortgagee a sum of money in satisfaction of a claim by the mortgagee on a separate policy of title insurance protecting it against title defects.

FACTS AND PROCEEDINGS

Background

This case was remitted by the Court of Appeals to the Supreme Court, Nassau County, for a trial on the issue of damages, the Court of Appeals having determined that defendant could not avoid its obligation under the title policy existing between it and the plaintiff (Smirlock Realty Corp. v. Title Guar. Co., 52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650). The trial as to damages has now been held, and both parties have appealed.

Both the above-cited decision of the Court of Appeals and our previous decision when this case was last before us (Smirlock Realty Corp. v. Title Guar. Co., 70 A.D.2d 455, 421 N.Y.S.2d 232) include detailed factual recitations, so it is unnecessary to set forth here a complete description of the background to this litigation. However, a partial exposition will be helpful, and, of course, events which pertain to the damages issues need to be highlighted.

On May 14, 1969, plaintiff purchased a certain warehouse property, located at 31-39 Carvel Place, Inwood, New York, from Bass Rock Holding, Inc. (Bass Rock) for the sum of $600,000. A foreclosure proceeding against Bass Rock had been instituted earlier that year. Plaintiff paid approximately $65,000 and gave $20,000 in notes at the closing, took title subject to two prior mortgages held by the Jefferson County Savings Bank (the bank) and gave a mortgage to that bank for the balance of the purchase price, after which all three mortgages were consolidated into a new mortgage lien of $535,000. On the date of the closing defendant issued two title policies, one to plaintiff and the other to the bank. The plaintiff's fee ownership of the property was covered for $600,000, while the mortgage interest of the bank was insured for $535,000.

At the time of sale, access to the property was over three public streets: Carvel Place to the north and St. George Place and Jeanette Avenue to the east. The warehouse loading docks for larger trucks were located at the easterly end of the building, with direct access from St. George Place and Jeanette Avenue. In addition, an alley connected Carvel Place with this loading dock area. However, because of the size of the alley, large trucks could not use this route.

Some two years prior to the closing date, the roadbeds of St. George Place and Jeanette Avenue and a small slice of land along Carvel Place had been condemned by the Town of Hempstead for urban renewal purposes. As described in our prior decision, at the time of closing plaintiff did have reason to know of the Carvel Place taking. However, it did not know about the condemnation of the St. George Place and Jeanette Avenue roadbeds (Smirlock Realty Corp. v. Title Guar. Co., 70 A.D.2d 455, 461, 421 N.Y.S.2d 232, supra ). No exception was listed in either title insurance policy for any condemnation pertaining to the three streets. Apparently, defendant's title searcher had neglected to make the appropriate inquiry in the Nassau County Clerk's office, which would have revealed the condemnations.

Commencing the day after the acquisition of the property, plaintiff leased the premises to Pan American World Airways, Inc. (Pan Am) for a three-year term, at an annual rental of $118,262.25. Pursuant to its agreement with Pan Am, within the On or about November 1, 1971, Jeanette Avenue and St. George Place began to be ripped up pursuant to the urban renewal plan of the Town of Hempstead. That plan required the closing of the warehouse access routes via these streets. Pan Am began to remove its property from the premises but continued to pay rent up through April 14, 1972. It did not pay rent for May of that year, the last month of the lease term.

six-week period following the closing, plaintiff spent $95,000 in improving the property.

Recognizing the problems closure of St. George Place and Jeanette Avenue would cause, representatives of plaintiff and defendant met before Christmas of 1971 to discuss what should be done. An accord, apparently never reduced to writing, was reached whereby plaintiff was to bring an inverse condemnation proceeding, during which, according to plaintiff, defendant would carry the mortgage and tax expenses while plaintiff would bear the expense of maintaining the building. During the period following the accord, plaintiff, albeit unsuccessfully, made fairly extensive efforts to rent or sell the property.

In the inverse condemnation proceeding, plaintiff contested the vesting of title to the beds of St. George Place and Jeanette Avenue, and also argued, in the alternative, that as a result of the condemnation, its property became landlocked. In an opinion by Justice HOGAN, dated February 22, 1973, the Supreme Court, Nassau County, held against plaintiff. Plaintiff appealed to this court from the order denying its claims, and we affirmed, without opinion, on October 1, 1973 (Matter of Town of Hempstead [Smirlock Realty Corp.], 42 A.D.2d 1056, 347 N.Y.S.2d 950). On November 15, 1974, the Court of Appeals denied leave to appeal from the final judgment entered in the inverse condemnation proceeding (35 N.Y.2d 643, 362 N.Y.S.2d 1025, 320 N.E.2d 872). On August 14, 1973, during the pendency of the inverse condemnation appeal to this court, plaintiff, defendant and the Jefferson County Savings Bank, which had by then changed its name to Community Savings Bank, entered into a tri-party agreement, the purpose of which was "to delay the foreclosure of The Bank's mortgage until the determination of said appeal". Pursuant to the agreement, the bank was to forbear from foreclosing on the mortgage, defendant title company was to pay the real property taxes, and plaintiff was to maintain the premises.

The bank, nevertheless, commenced a foreclosure action on or before July 12, 1974. In May, 1975, plaintiff withdrew its opposition to the foreclosure action, and a judgment of foreclosure and sale was entered on July 2, 1975. The judgment recites, as the sum due, a figure of $555,643.82. The property was sold at public auction, with the bank purchasing it for the sum of $1,000.

The record does not reveal whether the bank sought a deficiency judgment against plaintiff. The bank did finally sell the property to U-Haul of Long Island, Inc. (U-Haul) on May 8, 1978, for $300,000. The bank also made a claim for the full amount of the title policy with defendant. The claim was settled on November 13, 1978, for the sum of $32,500.

In April, 1975, a month before it withdrew its answer in the foreclosure action, plaintiff commenced this suit, seeking to recover, inter alia, the sum of $600,000 under its policy of title insurance. In its answer, defendant asserted several affirmative defenses and also counterclaimed for $71,550.08, allegedly for expenses incurred on plaintiff's behalf in forestalling the foreclosure of the property. As already mentioned, the Court of Appeals has held for the plaintiff with respect to defendant's liability under the policy, remitting the matter solely for a trial on damages (Smirlock Realty Corp. v. Title Guar. Co., 52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650, supra ). However, the court affirmed the trial court's determination in defendant's favor on the counterclaim (52 N.Y.2d 179, 191, 437 N.Y.S.2d 57, 418 N.E.2d 650, supra ).

Evidence as to Damages

Plaintiff's theory of damages, maintained both at trial and on appeal, is that its loss should be measured by "the difference in market value between the property with the encumbrance and without the encumbrance", plus incidental damages. Its attorney stipulated that May 14, 1969 should be used as the valuation date for determining the value of the property, but with the $95,000 worth of improvements being taken into account. Defendant agreed with the May 14, 1969 date but maintained that plaintiff's loss was only its equity in the property. Furthermore, the improvements were not to be taken into account.

Placing his primary reliance upon the capitalization of income theory of valuation, plaintiff's expert determined that the value of the property at the time of the 1969 sale, as improved and with access via St. George Place and Jeanette Avenue, was $867,500. He arrived at this figure by first estimating the gross rental value of the property "based on comparable rentals and the rental of the property itself to Pan Am". He found a gross potential income of $119,250, and then derived a net income of $79,800 by allowing for various factors and...