Can A Servicer Be Hurt In A Strict Foreclosure?

We relate so many tales of woe in these alerts that we happily report the answer to the question raised by the title as probably not – at least not much.  The rule here (which we will explore and explain in a moment) is confirmed in a case of fairly recent vintage.  Bankers Trust v. Thompson, 12 A.D.3d 387, 785 N.Y.S.2d 86 (2d Dept 2004).

Quickly reviewing the strict foreclosure scenario and then mentioning why this case is so pleasing will be our mission here.

In general terms, the goal of a mortgage foreclosure action is to name and serve all parties with a junior, subordinate interest to the mortgage being foreclosed so that the purchaser at the foreclosure sale obtains a clean title.  That is the path which brings the highest sale price.

Sometimes, though, a necessary defendant who should be in the action is missed, that is, someone who could have been served was not.  The search may not reveal a junior mortgage or a judgment creditor, or, the process server might fail to notice the presence of a tenant, or any number of other mishaps.  Suffice it to say that this does occur from time to time.  The result is that any person or entity not named and served in the action holds an interest which survives the foreclosure – it continues to burden the property.

So, for example, if someone bid $400,000 for a house worth $500,000, but a $200,000 judgment still existed on the property, there is obviously a problem.  This is the same issue if the lender bid in and bought back the property.

Enter the strict foreclosure as a remedy.  This is an action begun after the original foreclosure is concluded by delivery of a deed. It is based upon the theory that a party not named in the original foreclosure is given an opportunity now to redeem the mortgage; pay it off.  So if the previously unnamed party pays the money, then whatever interest it had is preserved.  If it doesn’t pay, then it is cut off just as if it had been made a party in the original foreclosure action.

This then leads us to the question of what is it that the previously excluded party needs to pay in the strict foreclosure to avoid permanent extinguishment of his interest.  Suppose, a lender is owed $300,000, but the property is only worth $200,000.  Upon the strict foreclosure against some party who had been left out of the original foreclosure, what would they have to pay to redeem – the $200,000 bid in at the sale by the plaintiff or the $300,000 due on the mortgage?  If the answer is the $200,000, and mindful that the lender likely will not have pursued a deficiency, that will be painful.  Pleasingly, the answer is that the amount required to redeem in a strict foreclosure is not the amount which was bid in at the sale, but rather the total amount, inclusive of principal and interest, which was due on the mortgage at the time of the foreclosure sale.

So, if there is a redemption in a strict foreclosure action where the plaintiff has been the bidder and is now the owner of the property, the result works very well.

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.