The New York Court of Appeals, the state’s highest court, recently held that the statute of limitations does not bar an action to cancel a mortgage based upon a forged deed.

A copy of the opinion is available here.

The plaintiff was the administrator of her deceased father’s estate. The decedent and his sister (the “aunt”) inherited from their mother a house in Brooklyn as tenants-in-common.

Several years later, in May 2000, the aunt executed a quitclaim deed conveying her one-half interest in the property to her daughter (the “cousin”). In February 2001, the cousin recorded a corrective deed that purported to convey the decedent father’s one-half interest in the property to her, thus giving her fee simple title. The decedent father died shortly thereafter, in March 2001.

The plaintiff sued her aunt and cousin in September 2002, alleging that the corrective deed was void because her father’s signature was forged. The trial court dismissed the complaint in April 2003 because the plaintiff lacked standing, as she was not the estate’s administrator at the time.

In December 2009, the cousin obtained a mortgage loan.

In July 2010, New York’s Surrogate’s Court appointed plaintiff the administrator of her deceased father’s estate. One month later, in August 2010, the plaintiff filed suit against her aunt, cousin, the lender and the mortgagee, seeking a declaration that the corrective deed and mortgage were null and void due to the alleged forgery.

The lender moved to dismiss the complaint as time-barred under NYCPLR 3211(a)(5) and NYCPLR 213(8), which the trial court granted. The Appellate Division denied the motion to dismiss on procedural grounds and left the case pending against the individual defendants and the mortgagee, but granted the motion to dismiss as to the defendant lender, reasoning that the plaintiff’s claim based on forgery was subject to the six-year state of limitations for fraud contained in NYCPLR 213(8).

The plaintiff moved for leave to appeal the order granting the lender’s motion to dismiss, and the Court of Appeals granted the motion.

On appeal, the Appellate Court began by noting that because the case involved an appeal from a dismissal under NYCPLR 3211(a)(5), it had to accept the facts alleged in the complaint as true, draw every possible favorable inference in plaintiff’s favor, and “determine only whether the facts as alleged fit within any cognizable legal theory.” This included, of course, the plaintiff’s allegation that the corrective deed was forged.

The Appellate Court agreed with the plaintiff’s argument that, because a forged deed is “void ab initio” or has no legal effect whatsoever from its inception, the statute limitations for fraud claims set forth in NYCPLR 213(8) did not apply to her claims to declare the forged deed and the bank’s mortgage based thereon null and void.

The Appellate Court distinguished between two different types of forgeries: a deed bearing a forged signature is void, while a deed in which the grantor’s signature is obtained by fraud is merely voidable. Unlike a void deed, which conveys no interest whatsoever, a voidable deed is valid until set aside by court order and title can be transferred to a bona fide purchaser for value.

Under venerable New York case law, a void deed conveys nothing, and therefore the Appellate Court noted a mortgage based on a forged deed is also not a valid encumbrance on real property, and a subsequent bona fide purchaser or mortgagee for value receives nothing and will not be protected.

In addition, the Appellate Court noted that New York’s recording statute does not apply to a forged deed, but only to genuine instruments and, thus the fact that the allegedly forged instrument was recorded is legally meaningless.

Turning to the issue of whether a claim attacking a conveyance or mortgage of real property based on a void deed is subject to a statute of limitations, the Appellate Court concluded that New York case law compelled the answer that “a claim against a forged deed is not subject to a statute of limitations defense.”

The Court explained that this is because the legal status of a void instrument does not change, no matter how long it takes for the forgery to be discovered.  The Appellate Court held that, because the statute of limitations does not validate a void instrument by the mere passage of time, the plaintiff could seek to set aside the fraudulent deed and mortgage based thereon. The Court pointed out that its reasoning was in line with that of the courts of last resort in Florida, West Virginia and Idaho, which held that there is no statute of limitations that applies to a forged or void instrument.

The Appellate Court rejected the lender’s argument that the plaintiff’s claim is time-barred because forgery is a species of fraud, which is subject to the six-year limitations period under NYCPLR 213 (8).  This argument the Court held could not be reconciled with principles set forth in the Court’s decisions in Marden v. Dorthy, 160 NY 39 (1899) and Riverside Syndicate, Inc. v. Munroe, 10 NY 3d 18 (2008), nor was it according to the Court supported by any compelling policy reasons.

As a matter of public policy, the Appellate Court refused to recognize any distinction between illegal contracts and forged deeds or impose a statute of limitations on forged deeds because “the resulting prejudice to the ‘rights of the true owner of real estate’ only ‘open[s] the door for the destruction of all titles, and makes it much easier for the criminal to purloin real than personal property.’”

The Court likewise rejected the lender’s policy-based argument that that statute of limitations is needed to protect the sanctity of real property titles because NYCPLR section 213(8) itself contains a two-year “discovery rule,” meaning that by definition the life of a claim can already extend far into the future beyond the six-year limitations period. In addition, the Appellate Court pointed out that some property claims, like the claim of an owner in possession to remove a fraudulent encumbrance as a cloud on title, or a plaintiff’s action challenging the forced sale of property where he paid the taxes (rendering the tax deed void from inception), simply cannot be barred by the passage of time.

Accordingly, the order of the intermediate Appellate Division was reversed, and the defendant lender’s motion to dismiss denied.