New Foreclosure Statute – Effect On Titles

Effective as of December 15, 2009 – but with various waiting periods for each section – New York has passed significant changes and additions to various foreclosure provisions which will have serious impact on foreclosure actions.  This vital topic was the subject of our mid-December 2009 alert advising in outline form of the statute, followed a few days later by a lengthy alert analyzing the provisions in considerable detail.  We now address the statute with the perspective of its effect upon titles and what title companies may need to consider.  This is relevant to our lender and servicer readers because they will encounter new exceptions to title at foreclosure closings and need to be prepared for those.

Insofar as title insurers must sometimes pay an insured mortgagee and then themselves prosecute a foreclosure, or as part of coverage to cure a defect in the mortgage, understanding the foreclosure process as now modified has meaning.  Of perhaps more immediate focus, though, is the question of whether the new requirements will affect searches and insuring titles devolving through foreclosures.  The answer is yes.  A thumbnail mention of the new requirements as they relate to foreclosure actions with comment as to the relationship to titles follows.

• Pursuant to RPAPL §1303, notice to all tenants concerning rights to remain at the mortgaged premises must be mailed within ten days of service of the summons and complaint (even if tenants are not being served), posting required for buildings of five or more units. (Effective 30 days after December 15, 2009.)

This, of course, creates a new burden for foreclosing lenders.  But their problem could become the abstract or insurer’s concern as well.

First, when the ten days begins to run is pointedly uncertain.  The statute measures the time from service of the summons and complaint – but upon whom?  Foreclosures typically have multiple defendants in addition to the mortgagor or owner (who are not always the same).  Insofar as the provision assumes service upon the tenant as the starting date, not all tenants can or will be served.  Rent protected tenants, for example, should never be made defendants because their interest cannot be extinguished.  Foreclosing lenders may choose not to include other defendants for various strategic reasons.

Even were the statute lucid on this issue, when precisely service has occurred is also open to interpretation.  When process is served pursuant to CPLR §308(2) (suitable age) or §308(4) (“nail and mail”) after delivery or annexation respectively, a mailing is required.  Then, service is not complete until ten days after the affidavit of delivery (or annexation) and mailing is filed with court.  So, when does the new statute deem service to have been made? Because this is unknown, the ten day requirement becomes elusive and potentially raises issues as to a lender’s compliance with the dictates.

Next, if the tenant’s name is known (which will be unlikely) notice must be by both certified mail return receipt requested and regular mail.  If the tenant’s identity is unknown, then the mailing is to be by first class mail.  Posting the notice at each entrance and exit of the structure substitutes for the mailing obligation where there are five or more dwelling units.

The potential problem is that a tenant – or even the defaulting mortgagor – could allege during the foreclosure action that a notice was not sent or the posting was not done.  That presents delay and expense for the foreclosing party.  For the title company the problem is the assertion after sale and after a title is insured that a notice was not received or the posting was not accomplished.

It would be easy for any tenant, or interloper, to remove the posted notice.  It would be just as facile for the mortgagor or tenant to simply assert either that the posting was not accomplished or that the mailed notice was never received.  (Mailing is the obligation – not receipt – but denial of receipt puts the mailing at issue.)

There is abundant law for the proposition that a mistake not resulting in prejudice can be treated as merely ministerial and not fatal.  [See discussion at 1 Bergman on New York Mortgage Foreclosures §2.06A, LexisNexis Matthew Bender (rev. 2009).]  While it would seem that neglect to mail or post the notice (if even true) would not be genuinely prejudicial, it is impossible to predict what any court might do.  And the statute is silent as to any consequence of non-compliance.

Therefore, title insurers will require proof in the record that the mailing or posting mandates were adhered to.  This is an obvious new insurance necessity. But then, just as defendants can claim they were never served, so too can they challenge the tenant notice imperatives, affidavits notwithstanding.

• Pursuant to RPAPL §1304, ninety-day notice of default to be sent to borrowers for all home loans, including co-ops, (no longer confined to sub-prime or any amount) as a condition precedent to foreclosure. (Effective 30 days after December 15, 2009.)

Home loan is no longer confined to any amount.  It is a loan to a natural person (therefore not a corporation an LLC or LLP), with the debt incurred primarily for personal, family or household purposes and the security – the mortgaged property – improved by a one-to-four family dwelling or a condominium unit (the expansion to a condo is new) “used or occupied, or intended to be used or occupied wholly or partly, as the home or residence of one or more persons which is or will be occupied by the borrower as the borrower’s principal dwelling.”

“Foreclosure” of a co-op interest now elicits a ninety-day notice too, per amendment to the Uniform Commercial Code. (UCC 9-611)  For a lender who may propose to take the co-op without a sale, or if the borrower offers the equivalent of a deed in lieu of foreclosure, new provisions apply and should be consulted.  (UCC 9-620(h))

The ninety-day notice is a condition precedent to foreclosure so proof that it was sent will be a needed aspect to insure a foreclosure title.  Although it seems unlikely that a foreclosure would proceed to a sale with this notice unchallenged, so that any issue about it would likely have been resolved during the action, it nevertheless becomes an item to address.

• Pursuant to RPAPL §1305, post-sale notice to be given to all tenants or occupants at a “residential building” allowing those with a lease (even oral or implied) to remain for the balance of the lease (others to remain for 90 days after notice.) (Effective 30 days after December 15, 2009.)

It must be understood that residential real property (for which the tenant notice is required) is defined as any building or structure that is, or may be used, in whole or in part, as the home of one or more persons and includes any building used for both residential and commercial purposes. [RPAPL §1305(1)(a)]  In short, from a one family home, to the largest apartment building, to any mixed use structure, tenant notification will be required.

Because the notice is to be sent by the new owner of the property, it is a post-deed (and usually post insurance) act of the insured owner.  Thus, it typically would not raise new title concerns.  But the extent to which foreclosure titles are burdened by occupancies or tenancies is new.

Previously, the interest of a tenant or occupant named and served in the foreclosure (or whose interest arose after the filing of the notice of pendency) was extinguished by the foreclosure sale.  (An exception was rent protected tenants who should not have been served in the first instance.)  Federal legislation has recently imposed this for federally related loans; this statute reverses priorities for all residential real property foreclosures so that occupants can remain for 90 days and lessees remain for the life of their leases, even though otherwise subordinate to the foreclosed mortgage.

Mindful that both oral and implied leases (whatever these creatures are) receive the protection and priority reversal, no one can ever know with certainty who can remain in possession.  All this will have to be accounted for as exceptions to title.

• Pursuant to RPAPL §1306, within three business days after mailing the pre-foreclosure ninety-day notice, the lender must file electronically certain information about the mortgage loan with the Superintendent of Banks and then plead compliance with this requirement in any foreclosure complaint. (Effective 60 days after December 15, 2009.)

The superintendent has 180 days, or such further time as he will need, to establish this electronic filing system.  For the moment, therefore, it is impossible for lenders to comply and thereby plead compliance in any complaint – not a title company’s issue (unless a lender pleads compliance when it could not have been accomplished).  When the system is in place, though, the insurance question will be, has there been compliance and was it pleaded in the complaint? The difficulty in confirming compliance and assessing the possible risk posed by post-sale assertions of non-compliance assaulting the foreclosure sale (and thus the title) is that the mandated information is simply too vague.

At least as to the information specifically categorized, it is possible for lenders to comply (if the electronic system existed).  But how can the lender or the insurer determine what is included in “such other information as will enable the superintendent to ascertain the type of loan at issue”?

The superintendent is then empowered to request further information. Rhetorical questions are in order.  How often?  What exactly is “readily available?”  What precisely might be reasonably necessary for the superintendent to glean how to help a borrower?  How could any such thing be devised without extensively reviewing the borrowers finances?

• Pursuant to RPAPL §1307, lender to be responsible to maintain property in foreclosure action after “obtaining” judgment of foreclosure and sale until recording of referee’s deed out of a sale. This obligation applies if property is vacant, becomes vacant after judgment, or is tenant-occupied but abandoned by the mortgagor. (Effective 120 days after December 15, 2009.)

This is a burden falling to lenders and while it presents enormous issues for them, only one aspect could relate to title but should not be new.  The maintenance and repair obligation is enforceable by the local municipality, a tenant lawfully in possession and, if applicable, a homeowner’s association.  This allows a personal judgment for the cost to be pursued against the lender.  To the extent the municipal entity might choose to lien the mortgaged premises, unless the repair comes under a super lien, it is subject to extinguishment by the foreclosure sale.  So while all this is trouble some for lenders it seems not to invoke additional title insurer responsibility.

• Pursuant to CPLR §3408(a), mandatory conferences for all home loans (one-to-four family owner-occupied) within sixty days of filing proof of service with the court, negotiations to be in good faith. (Effective 60 days after December 15, 2009.)

A home loan foreclosure could not proceed to order of reference, much less foreclosure judgment and then sale, with the conference has been held.  So while the conference is a meaningful prerequisite to a valid foreclosure title (of a home loan), it is most unlikely to have been overlooked.  Nevertheless, it is yet another stage to be confirmed in an analysis of title.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.