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Source: www.nyfraudclaims.com

In a recent post, I explained the difference between “fraud in the factum” and fraudulent inducement. In this post, I discuss the legal consequences deriving from these two doctrines. Documents executed by way of “fraud in the factum” are void ab initio (they are as though they never existed), while documents induced by fraud are voidable – subject to challenge. More on this below.

Void and Voidable

An interesting decision of the Appellate Division Second Department lays out the distinctions between fraud in the factum and fraudulent inducement, and the legal consequences flowing therefrom. In Dalessio v Kressler, 2004 NY Slip Op 01533 [6 AD3d 57] (2d Dep’t 2004), the plaintiff claimed that he was induced to execute a check and turn it over to those who represented to him that his girlfriend was in debt, needed the money to repay the debt, and would not marry him unless the debt was paid. (Yes, a bit bizarre, but the decision gets the relevant legal points across. And the girlfriend’s name was Jennifer Lopez.) The plaintiff subsequently tried to stop payment on the check. As relevant here, the Court explained the applicable law rather nicely, as follows:

The plaintiff does not dispute that he knowingly executed a certified check payable to Kressler. Accordingly, the nature of Kressler’s alleged fraud is fraud in the inducement, not fraud in the factum (see First Natl. Bank of Odessa v Fazzari, 10 NY2d 394, 397 [1961]; Mechwart v Mechwart, 292 AD2d 354 [2002]; Mix v Neff, 99 AD2d 180, 182-183 [1984]; Federal Deposit Ins. Corp. v Kassel, 72 AD2d 787, 788 [1979]).

In the case of fraud in the factum, the maker is induced to sign something entirely different than what he thought he was signing (see First Natl. Bank of Odessa v Fazzari, supra at 397). The instrument is “void ab initio” (Mix v Neff, supra at 182). However, fraud in the inducement renders the obligation voidable based upon facts occurring prior or subsequent to its execution (see Mix v Neff, supra at 183).

The elements of a cause of action sounding in fraudulent inducement are “representation of a material existing fact, falsity, scienter, deception and injury” (Channel Master Corp. v Aluminium Ltd. Sales, 4 NY2d 403, 407 [1958]). The plaintiff’s entitlement to a preliminary injunction was dependent upon his establishing a likelihood of success on the merits (see Chrys v D.C.G. Dev. Co., 187 AD2d 923, 924 [1992]).

The plaintiff claims that he executed the certified check and gave it to Kressler based upon a promise that if he made those payments his girlfriend Jennifer Lopez would marry him. There are a number of difficulties with the plaintiff’s cause of action. It is unclear as to whether the plaintiff is claiming that Kressler falsely represented that she was acting on behalf of Jennifer Lopez or whether Kressler, acting in concert with Lopez, falsely represented that Lopez would marry the plaintiff if he paid $107,000.{**6 AD3d at 62}

If the alleged misrepresentation was a promise to marry there are additional difficulties. Essential to a cause of action sounding in fraudulent inducement based upon a false promise is that the defendant had no intention to perform the promise at the time it was made (see Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956 [1986]; Channel Master Corp. v Aluminium Ltd. Sales, supra; Nastro Contr. v Agusta, 217 AD2d 874 [1995]). Assuming arguendo that there was an intent to perform, any promise to marry would be legally unenforceable (see Civil Rights Law § 80-a).

The plaintiff’s assertions in support of his cause of action were insufficient to establish his likelihood of success on the merits (see Chrys v D.C.G. Dev. Co., supra). Accordingly, it is apparent that he never should have been afforded injunctive relief against Republic. If Republic [*4]had sought vacatur of the injunction against it, its application should have been granted.

As further explained in a very old, but cogent decision of the New York Court of Appeals, a document executed by forgery or through false pretenses (fraud in the factum) is void from the outset. So a deed that was either forged, or signed thinking it was not a deed, is void, because as the Court neatly observed: “Void things are as no things.” Marden v. Dorthy, 160 NY 39, 56 (1899). Voidable documents, however, are treated differently, as the Court explained:

It is doubtless true that a fraudulent grantee of real property may create a valid incumbrance upon it in favor of innocent parties, since, as to such parties, he has the title and has been clothed with power to deal with the property. When the owner of land executes and delivers to another a deed of it, the title passes to the grantee named therein, although the former was induced by fraud to execute and deliver the instrument. The deed is not void, but voidable, and, until set aside, it has the effect of transferring the title to the fraudulent grantee, and the latter, being thus clothed with all the evidences of good title, may incumber the property to a party who becomes a purchaser in good faith.

Marden, 160 NY at 50.

First Department New Decision

Weiss v Phillips2017 NY Slip Op 08209 (1st Dep’t Decided on November 21, 2017) discussed the void and voidable distinction in connection with a deed and mortgage. The Court explained the relevant law in a cogent, clear and very instructive manner:

[Defendant] Phillips … argues that the mortgage is not enforceable because it was based on a [*7]”fraudulent/forged deed.” We reject this argument. Essentially, Phillips asserts that because McCarthy and Smith never had title in the first place, they never had anything to mortgage. Thus, the mortgage was invalid. Phillips’s argument, however, conflates the distinction between a void deed and a voidable deed.

To be clear, a deed may be cancelled because it is void or because it is voidable. The difference, however, between a void deed and a voidable deed is important under the law because it affects a party’s ability to defend against a future purchaser or encumbrancer for value. A void real estate transaction is one where the law deems that no transfer actually occurred (Faison v Lewis, 25 NY3d 220, 225 [2015]). Accordingly, if the deed is void, it does not pass title and cannot be enforced even if title is later acquired by a bona fide purchaser (id.; ABN AMRO Mtge. Group, Inc. v Stephens, 91 AD3d 801, 803 [2d Dept 2012]). Similarly, a lender who takes a mortgage to a property subject to a void deed does not have anything to mortgage, so the lender’s mortgage is invalid as well (Cruz v Cruz, 37 AD3d 754 [2d Dept 2007]; Yin Wu v Wu, 288 AD2d 104, 105 [1st Dept 2001]). In contrast, a voidable real estate transaction is one where a transfer is deemed to have occurred, but can be revoked. In that situation the deed is only voidable (Faison v Lewis, 25 NY3d at 225).

The question becomes whether the deed by which Welch-Ford and Smith acquired the subject real estate was a void deed or a voidable deed. Forged deeds and/or encumbrances are those executed under false pretenses, and are void ab initio (see Marden v Dorthy, 160 NY 39 [1899]; GMAC Mtge. Corp. v Chan, 56 AD3d 521, 522 [2d Dept 2008]; Cruz v Cruz, 37 AD3d 754). The interests of subsequent bona fide purchasers or encumbrancers for value are thus not protected under Real Property Law § 266 [FN7] when their title is derived from a forged deed or one that is the product of false pretenses (see Ameriquest Mtge. Co. v Gaffney, 41 AD3d 750 [2d Dept 2007]; LaSalle Bank Natl. Assn. v Ally, 39 AD3d 597, 599-600 [2d Dept 2007]). In contrast, a fraudulently induced deed is merely voidable, not void (see Marden v Dorthy, 160 NY at 150; Dalessio v Kressler, 6 AD3d 57, 61 [2d Dept 2004]; Yin Wu v Wu, 288 AD2d at 105).

In this case, Phillips improperly labels the instrument by which the improper transfer took place as both a “fraudulent/forged deed.” The undisputed facts establish, however, that the deed was the result of fraudulent inducement, rather than the result of a forged deed or one executed under false pretenses. As fully explained above, the tortfeasor (at the time, a paralegal assigned to procure the deed transfer) obtained the owner’s signature on the deed purportedly to transfer the property back to its original owner, Phillips. The paralegal presented the owner with a blank deed, which she signed. The subsequent deed transfer was the result of a classic fraudulent inducement, because the owner believed that she was signing the deed in order to transfer the property back to its original owner, Phillips. Instead, the deed transferred the property to the paralegal’s mother and then himself, before they obtained a loan and mortgage from Weiss. Thus, the deed here was voidable, not void ab initio.

Commentary

If the signature on a legal document is simply a forgery, that document is void from the outset, as though it never existed. Similarly if the signer executed it thinking it was something other than what it actually was (the rare instance of fraud in the factum – see my post), then the document that was so executed is also void. But if the person who executes the document knows what the document is, yet is induced to sign it based upon common law fraudulent misrepresentations, that document must be challenged in order to become ineffective. This often affects the rights of bona fide third parties who have relied on the validity of such documents. There can be no rights derived from void documents.