Slow Foreclosure vs. Condo Lien – What Are The Rights?

There is a frequent clash between banks (and other lenders) foreclosing mortgages on condominium units and condominiums accruing common charges on those units.  The contretemps arise not from any issue about seniority (a first mortgage trumps a condominium common charge lien) but from duration of the bank foreclosure.  It is a frequent message of these alerts – and a verity widely recognized by lenders and servicers – that home loan foreclosures in New York typically proceed at a glacial pace.  We need not outline the reasons here, but it is an indisputable fact.

If a foreclosure is proceeding at the proverbial snail’s pace, are there weapons available to the condominium to protect itself?  A new case from Supreme Court, Westchester County, Connolly, J., emphasizes and clarifies the principles and answers the question “yes” and “no”.  [Bank of America, N.A. v. Brooks, 2014 NY Slip Op 50923(u)].  From the lender’s perspective, one peril is highlighted, another rejected.  The reverse perspective for the condo is that one weapon is highlighted, another banished.

CONDO WEAPON PRESERVED

While not awarding a remedy to the condo in this regard, the court acknowledged that delay in prosecuting a foreclosure action can be the basis to eliminate or reduce interest due on the mortgage.  This is an important principle not so widely recognized, which, of course, is not to the advantage of lenders and servicers.  The technical portion is that New York’s practice statute (the CPLR, section 5001) provides that in an action at equity (a mortgage foreclosure is an equity action) the court has the discretion to compute the rate of interest and the date from which it shall be computed.

One category which can precipitate this discretion is delay on the part of the lender and this is the practical aspect.  To understand this, suppose a lender begins an action on January 1, service of process is complete on March 1 and at that point the lender could proceed to obtain the appointment of a referee.  Suppose, however, that for whatever reason the lender does not pursue appointing the referee in a week or two or three, but rather waits until the following January 1.  Assuming generously that the referee’s appointment could have been sought within a month of its availability, the delay here is from April 1 through January 1 – nine months.

Should a borrower and junior encumbrancers be liable for nine months accrual of interest, particularly at a default rate, merely because the lender decided to do nothing?  The answer can be no and that is why the court has discretion to reduce or eliminate interest for that period of delay.

This is an argument that condominiums can make when a mortgage foreclosure action is unduly delayed and where the fault for the delay lies with the lender or servicer.  [For case law on this and further discussion, see 1 Bergman on New York Mortgage Foreclosures, §2.20[3], LexisNexis Matthew Bender (rev. 2014).].

CONDO WEAPON STRICKEN

In Westchester Supreme Court there was an earlier decision dated June 27, 2012 in a case where the condominium was understandably attacking a foreclosing lender for interminably stalling the foreclosure case.  All the while, condominium common charges were mounting to the obvious detriment of the condominium.  The argument was made that the foreclosing bank should pay the condominium common charges if it was not going to prosecute its own foreclosure action.  The court agreed and ruled that if the bank would not renew its prosecution within thirty days, thereafter it would indeed have to pay condominium common charges.  [J.P. Morgan Chase Bank, N.A. v. Malik, Order, June 27, 2012, Index No.: 15079/09, Supt. Ct., Westchester Co., Smith, J.].

This is certainly an intriguing argument and it is not an unreasonable posture to adopt.  However, there was no case law authority for it and when the point was addressed in the new case cited, the court rejected it, forcefully, on the very concept that there is just no authority for it; requiring the foreclosing plaintiff to pay the defendants’ accruing common charges to the board as damages would in effect subordinate the mortgage to the board’s lien.  Again, the court underscored that the delay could result in a reduction of interest, but not in the obligation of the foreclosing bank to pay the common charges of the condominium board.

This appears to be the first case that has clearly opined on these dual principles and it is therefore quite helpful as guidance both to foreclosing banks and condominium defendants.

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.