Foreclosing Plaintiff Liable For Duty Of Care In Conducting Sale?

The question:  If a foreclosing plaintiff errs in the foreclosure sale process, does that allow some other party in the case to sue the lender or servicer for negligence? “No” says a new case.

When conducting a foreclosure sale, there can always be the possibility of some error in the process.  Putting aside the actuality that the sale is conducted by a court-appointed referee, or under the further direction of a court clerk supervising the process at the courthouse, there could be errors in the notice or publication, or in what checks might or might not be accepted at the sale, among any number of other events.  If there is some mistake, can a junior party in the foreclosure sue the plaintiff for claimed damages based upon negligence?  A new case confirms what ought to be predicted – as mentioned, that the answer is in the negative. [Rabinowitz v. Deutsche Bank, 28 Misc.3d 611, 903 N.Y.S.2d 869 (Sup. Ct. 2010)].

In the noted case where this issue was addressed – which seems to be the first time it appeared in a reported decision – it was a junior mortgagee who claimed to be aggrieved by virtue of the conduct of the sale.  First the facts to make this more understandable, then the legal principle will be recited.

The issue here arose upon a postponement of the foreclosure sale, although the underlying rule should have equal application to an initial sale.  At the foreclosure sale, and after it was struck down to a successful bidder, that bidder declined to sign the terms of sale.  That voided the sale.  Accordingly, the foreclosing plaintiff advertised once for a postponed sale date.  [Case law confirms that this is adequate publication; see further discussion at 3 Bergman on New York Mortgage Foreclosures §30.03[2] LexisNexis Matthew Bender (Rev. 2011).]

The amount bid at the first sale (which was of no effect because the bidder wouldn’t sign) would have satisfied not only the mortgage of the foreclosing plaintiff, but the mortgage held by the second mortgagee.  Upon the adjourned sale, though, a lesser amount was bid so that the second mortgagee was paid nothing.  That elicited the suit against the foreclosing plaintiff by the second mortgagee claiming damages to it resulting from the supposed negligence.  What the second mortgagee asserted to be negligence was advertising the sale but once, and failing to take down the names of the other bidders at the initial sale so that one of them could have been declared the new successful bidder.

Because the single publication was sufficient as a matter of law, that claim was discarded.  As to the remaining negligence assertion, the court said there was simply no authority to support a duty of care upon a foreclosing plaintiff as to its conduct affecting the holder of the second mortgage.  So, even if there had been some negligence (although here there was no such finding) a foreclosing plaintiff has no duty to anyone in this regard.  It certainly wants to conduct the sale properly so that it cannot be upset, but a miscue does not give rise to a cause of action for damages arising from negligence as against the foreclosing party.

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.