NEXBANK SSB v. SOFFER (2019)

The history of this extensive litigation, useful as background for the present appeal, is recited in our order deciding a prior appeal (see 144 A.D.3d 457, 41 N.Y.S.3d 217 [1st Dept. 2016] ).

The difference between the unencumbered value of Town Square and its value as encumbered by a lis pendens and an action (in Nevada state court) for specific performance for transfer of that property is not a loss that was incurred by plaintiff, as required by defendants' guaranty.  Under New York law, which governs the guaranty, “ ‘incurred means become liable for’ ” (Rubin v. Empire Mut. Ins. Co., 25 N.Y.2d 426, 429, 306 N.Y.S.2d 914, 255 N.E.2d 154 [1969], quoting Beekman v. Van Dolsen, 70 Hun 288, 294, 24 N.Y.S. 414 [1893] ).  Clearly, plaintiff did not become liable for the difference between the encumbered and unencumbered value of Town Square.

Plaintiff contends that the above definition of “incurred” applies only in the insurance context.  However, while Rubin dealt with insurance, Beekman, which Rubin quoted, involved a guaranty.  Moreover, although plaintiff sues for breach of a guaranty, it relies on cases involving a covenant against encumbrances or a warranty of title (see Yonkers City Post No. 1666, Veterans of Foreign Wars of U.S. v. Josanth Realty Corp., 67 N.Y.2d 1029, 503 N.Y.S.2d 321, 494 N.E.2d 452 [1986];  West 90th Owners Corp. v. Schlechter, 165 A.D.2d 46, 565 N.Y.S.2d 9 [1st Dept. 1991], lv dismissed 77 N.Y.2d 939, 569 N.Y.S.2d 612, 572 N.E.2d 53 [1991] ).  However, “[a] guaranty is to be interpreted in the strictest manner” (White Rose Food v. Saleh, 99 N.Y.2d 589, 591, 758 N.Y.S.2d 253, 788 N.E.2d 602 [2003] ).  Rules about warranty of title should not be “indiscriminately extended[ed]” to the guaranty context (L. Smirlock Realty Corp. v. Tit. Guar. Co., 97 A.D.2d 208, 222, 469 N.Y.S.2d 415 [2d Dept. 1983], mod on other grounds 63 N.Y.2d 955, 483 N.Y.S.2d 984, 473 N.E.2d 234 [1984] ).

In any event, the measure of damages for breach of the covenant against encumbrances is either the cost of removal of the encumbrance or the difference in value between the land with the encumbrance and without it (Smirlock, 97 A.D.2d at 222, 469 N.Y.S.2d 415).  Where an encumbrance cannot be removed, the measure of damages ordinarily will be the difference between the value of the property without the defect in title and its value with the defect (id. at 226, 469 N.Y.S.2d 415).  In the case at bar, the defect—the lis pendens and the Nevada action—could be removed.  Hence, the measure of damages would be plaintiff's cost to remove the defect, i.e., its attorneys' fees in the Nevada litigation, which has been otherwise resolved.