Settling Foreclosure With A Deed – It Might Be A Mortgage!

Lenders and servicers may recognize that foreclosure actions, possibly as part of forbearance agreements, may be settled by including delivery of a deed from the borrower to the plaintiff or its attorney to hold in escrow to assure that certain promises will be kept.  Then, if the borrower defaults anew, the deed would be recorded, the mortgage holder would now own the property and presumably would not need to begin or complete a foreclosure action – an apparently neat solution for the lender’s purposes.

However, there is a particular statute in New York – Real Property Law § 320 -which provides in relevant part that a “deed conveying real property, which, by any other written instrument, appears to be intended only as security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.”

There is much case law as well supporting this mandate [see 2 Bergman on New York Mortgage Foreclosures §16.06, LexisNexis Mathew Bender (rev. 2019)] and it is the subject of a recent case which calls this to our attention anew.  [Simmons v. Reich, 171 A.D.3d 1237, 99 N.Y.S.3d 53 (2d 2019).]

In addition to citing the statute, the recent case also stated that the statute does not require a conclusive showing that the transfer was intended as security, rather, it is sufficient that the conveyance appears to be intended only as security in the nature of a mortgage.

Moreover, the court observed that in determining whether a deed was intended as security, examination may be made not only of the deed and a written agreement executed at the same time, but also of oral testimony bearing on the intent of the parties and to a consideration of the surrounding circumstances.

Finally, the court stated that where a deed may be deemed security for a promise – and therefore a mortgage – the holder of that deed given as security must proceed in the same manner as any other mortgage holder, by foreclosure and sale to extinguish the borrower’s interest.

In sum, the lender which takes a deed under these circumstances is in danger of inheriting not title, but another mortgage which simply (or not so simply) needs to be foreclosed as any other mortgage would be.

So, while care in this arena is certainly in order – a message of this alert – the ultimate conclusion in the cited case went the other way, pleasingly for the lender.  While the deed was held in escrow and only later recorded, it contained a handwritten notation providing “continuing lien on six mortgages totaling…”.  While the grantor of the deed contended that it served merely as security in the form of a mortgage and was not an absolute conveyance of the property, the court found that under the circumstances the borrower did not demonstrate that the deed was intended as security.  His submissions in support of the motion for summary judgment did not include an affidavit or any evidence specifically attesting to the nature and purpose the transaction.  The result was a trial was needed and the outcome remained unknown.

The usual message when discussing this subject is the warning to lenders to be very careful in taking a deed (when it’s not purely a deed-in-lieu) as part of a foreclosure settlement.  While that message still applies, here the lender may indeed not have made a mistake and may yet prevail, a welcome atypical situation.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2019), 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.