A new decision of the Appellate Division, Second Department (Gerlitz v Biddle, 2022 NY Slip Op 00851 (2d Dep’t Decided Feb. 9, 2022) addresses the distinction between transactions that are “void” and those that are “voidable” based upon allegations of fraudulent conduct.
I addressed this subject in detail in my post More on the Void/Voidable Dichotomy in Fraud and in First Department Explains Distinction Between Void and Voidable Documents and Corresponding Fraud.
Forgeries Equal Void Transactions
As it relates to fraud, a document that contains a forged signature of the party who appears to have signed the document is simply not valid at all from the inception (the courts use the Latin phase “void ab initio”). In law, such a document is deemed never to have existed legally since the person who is claimed to have signed it and agreed to whatever is stated in it did not actually sign it and never intended to do so. That is the nature of the forgery. The legal consequence of the forgery is the utter non-existence of the thing forged. As the cases show, this actually happens rather frequently, unfortunately, with respect to deeds to real property. Someone forges the signature of the owner of the real property on a deed purporting to convey the real property to another. If the true owner did not sign that deed, the signature was forged by another, and the owner was unaware and did not consent or give authority to sign that deed, then the deed is simply deemed never to have existed. Anything that happens thereafter based upon that forged deed (such as imposing mortgages on the real property after the void conveyance) is not legally valid. That is the context of a “void” document or transaction.
Fraudulent Inducement
On the other hand, if the person whose signature is on the document really did sign it, the legal analysis is different. If that person was induced to sign that document by relying on false representations of a material nature (but did actually know he or she was signing the document), that is generally known as “fraudulent inducement.” That is a traditional fraud claim. Under those circumstances, the document in question is deemed “voidable.” It is not considered to be non-existent for all purposes and from the outset. The courts in those circumstances consider a host of factors whether to invalidate the document or transaction.
Fraud in the Factum
There is a nuance on this aspect of the “void” concept where the signature on the document is not actually forged and the person really did sign the document. There is a a doctrine known as “fraud in the factum.” That refers to situations where the signer did actually sign the document, but based upon some sort of false information conveyed, the signer thought he or she was signing something different. If that is truly proved, than the document would be “void” as well. However, as I explained in my post, this doctrine should have little support in the modern era since it is universally-recognized that those who sign documents are deemed to have read and understood the contents, and they cannot later claim they did not know what was in the document they signed (as they have a duty to read it or at least seek adequate assistance to know what they are signing). I have written about this duty to read what one signs as it relates to attempted claims of fraud. See, e.g., Fraud Claims Barred by Signed Contracts Even if Not Read or Even Understood.
All of these concepts are laid out rather well in the New York Court of Appeals decision in Faison v Lewis,2015 NY Slip Op 04026 [25 NY3d 220] (2015)(discussing void and voidable distinction) and the Second Department’s decision in Dalessio v Kressler, 2004 NY Slip Op 01533 [6 AD3d 57] (2d Dep’t 2004)(explaining fraud in the factum).
Second Department’s Decision in Gerlitz
In Gerlitz, the issues arose in the context of an action to foreclose on a mortgage, a rather common factual scenario. The real property was owned by an individual who subsequently died. The decedent’s daughter obtained letters of administration from the Surrogate’s Court, officially appointing her the administrator of her father’s estate. She then transferred the real property at issue by signing a deed in favor of herself and her sister. The two then took out a loan and used the real property to grant a mortgage to secure repayment of the loan. After a default on the loan, the lender sued to foreclose on the mortgage.
… Enter other distributees under the decedent’s estate. The deceased had other family who were claiming rights under his estate. These heirs sought to probate a Will of the decedent, and challenged the authority of the administrator who was previously appointed. In settlement of the claims in the Surrogate’s Court, the two sisters agreed to the probate of the Will, and to convey title to the real property in question to the other heirs free and clear of the mortgage. The Surrogate’s Court also thereafter entered a decree removing the daughter as administrator of the estate.
The lower court in which the mortgage foreclosure action was pending refused to grant the sister’s (referred to as “Ebron” in the decision) motion to cancel the mortgage. The Second Department affirmed. The issue of “void” and “voidable” deeds is front and center in the analysis:
Contrary to Ebron’s contention, she failed to establish that the November 26, 2008 deed, as well as the subject mortgage, were void ab initio. A deed that is forged is a legal nullity, which conveys nothing, and a mortgage based on such a deed is likewise invalid (see Faison v Lewis, 25 NY3d 220, 225). However, a deed that is “acquired by fraudulent means” is merely voidable (id. at 224). A “voidable deed, ‘until set aside, . . . has the effect of transferring the title to the fraudulent grantee, and . . . being thus clothed with all the evidences of good title, may incumber the property to a party who becomes a purchaser in good faith'” (id. at 225, quoting Marden v Dorthy, 160 NY 39, 50).
Here, Ebron does not contend that the November 26, 2008 deed was forged—nor has she shown that the grantor executed it without authority and under false pretenses (see Cruz v Cruz, 37 AD3d 754). To the contrary, the record shows that the grantor, Biddle, was cloaked with apparent authority, since she executed the deed in her capacity as administrator of the decedent’s estate, pursuant to letters of administration issued by the Surrogate’s Court. The fact that Biddle’s letters of administration were later revoked—for reasons that are not known to this Court or apparent from the face of the record—does not render the deed void ab initio, but, at most, voidable (see Matter of Shau Chung Hu v Lowbet Realty Corp., 161 AD3d 986, 988).
Moreover, Ebron has neither argued nor showed that the plaintiff was not a bona fide encumbrancer of the property. Under these circumstances, Ebron has failed to establish that the deed or mortgage should be set aside based on fraud, as against the plaintiff (see id. at 989).
Commentary
In the absence of an outright forgery, documents that are signed under some sort of fraudulent or false circumstances are not necessarily invalid. The courts apply concepts of equity, fairness and reason to determine whether to undo a transaction permeated with false or fraudulent conduct. As shown in the Gerlitz case, the party seeking to enforce the transaction may indeed be an innocent victim and thereby entitled to the benefits of the challenged transaction.