## Facts

- Barbara Vitale openly occupied residential property owned by Salvatore Pinto under an unrecorded written lease that included a purchase option.
- The lease-option contemplated that Vitale could purchase the property “free of all encumbrances,” while permitting the owner to place a mortgage on the property up to $15,000 during the lease term.
- Vitale paid consideration for the option and remained in visible, continuous possession, but she did not record the lease-option agreement.
- While the lease was still in effect, Pinto (and, as to a second parcel, Lucy Ferrare) executed a blanket mortgage to Lloyd Capital Corp. securing a loan of $38,825; the mortgage covered Vitale’s premises and another property, and it was recorded in 1981.
- Lloyd knew the premises were tenant-occupied, but accepted Pinto’s assurances that Vitale was only a month-to-month tenant and that there was no written lease.
- Vitale later attempted to exercise the purchase option and sought conveyance of the property free of encumbrances.
- Vitale sued Pinto for specific performance of the option and sued Lloyd seeking to defeat or limit the mortgage as against her rights.
- The Supreme Court granted summary judgment to Vitale against Pinto and, after proceedings involving Lloyd, entered judgment declaring Lloyd’s mortgage “null and void” as it affected Vitale’s property; Lloyd appealed.

## Issues

1. Whether Lloyd Capital Corp. qualified as a bona fide mortgagee for value without notice under New York’s recording statute, despite Vitale’s open possession under an unrecorded lease-option.
2. If Lloyd was charged with notice of Vitale’s rights, whether the proper remedy was to void the mortgage as to the premises or to declare it subordinate to Vitale’s option rights, and in what amount.
3. Whether the judgment needed modification to reflect the trial court’s prior dismissal of one cause of action and to address severing Lloyd’s claim and remitting for further proceedings.

## Decision

- The Appellate Division held Lloyd was not a bona fide encumbrancer without notice because Vitale’s open and visible possession imposed a duty of inquiry, and Lloyd could not rely solely on Pinto’s assurances about the tenancy.
- The court modified the judgment to declare Lloyd’s mortgage subordinate to Vitale’s rights under the option to purchase to the extent of $23,825, rather than declaring the mortgage void as to the property.
- The court further modified the judgment to dismiss Vitale’s fourth cause of action consistent with the Supreme Court’s prior decision.
- The court added a provision severing Lloyd’s claim and remitted the matter to the Supreme Court, Kings County, for further proceedings consistent with the modification.
- As modified, the judgment was affirmed insofar as appealed from.

## Legal Principles

- In New York, open and notorious possession by someone other than the record owner places a purchaser or mortgagee on inquiry notice of the possessor’s rights.
- A subsequent mortgagee cannot claim the protection of the recording statute as a bona fide encumbrancer if it had notice—actual or imputed through possession—of a prior unrecorded interest that reasonable inquiry would have revealed.
- Knowledge that premises are tenant-occupied triggers a duty to investigate the nature and extent of the occupant’s rights; reliance on the owner’s unsupported characterization of the tenancy does not satisfy that duty.
- Where a lease-option permits limited mortgaging during the term, equitable relief may protect the option holder by subordinating the mortgage to the option rights to a specified amount, rather than canceling the mortgage in full.

## Conclusion

Vitale’s visible possession under an unrecorded lease-purchase option charged Lloyd with a duty to inquire, defeating Lloyd’s claim to bona fide mortgagee status; the Appellate Division therefore modified the judgment to subordinate (not void) the mortgage to Vitale’s option rights up to $23,825, dismissed a cause of action to match the trial court’s earlier ruling, severed Lloyd’s claim, and remitted for further proceedings.


Vitale v. Pinto, 118 A.D. 774 (1986)