The Consequences Of Sitting On A Foreclosure Judgment

While as a general rule foreclosing parties seek to move through the action as quickly as possible – all for good and obvious reasons – there are worthy countervailing compulsions which can interfere with this goal.  Among these are pressures from various sources to pursue settlement, public relations constraints or, sometimes, just an error.  (There is no issue about refraining from conducting the foreclosure sale pursuant to a forbearance agreement.)

It is, therefore, not so infrequent that a foreclosing lender or servicer finally arrives at the foreclosure judgment stage and then, perhaps for one of the reasons mentioned, holds in place.  A few weeks or months of inaction is not meaningful.  But what about a year, or two or much more?  Although it seems unlikely, it does happen and then the questions, or attacks, emerge.

The concern is relevant obviously to the plaintiff who needs to know that its judgment remains viable, but also to the property owner and junior mortgagees who are burdened by delay in conducting the foreclosure sale.  It happens not to be a recent case which spawned this analysis, but rather those critical questions and attacks.

The two main – and meaningful – concerns which arise relate to the interest rate borne by a judgment and the efficacy of the judgment with the passage of time.

THE INTEREST RATE

This issue is more a matter of business and strategy; lenders and servicers should be familiar with the principles.

Before a mortgage foreclosure action reaches the plateau of judgment (and that is most of the time consumed) the mortgage obligation bears interest at either, or a combination, of the note rate and the default rate, if provision for the latter is properly expressed in the mortgage documents.  [There is a bit more to this concept and for those who seek further explanation, attention is invited to 1 Bergman on New York Mortgage Foreclosures, §1.11, LexisNexis Matthew Bender (rev. 2014).]

Once the judgment of foreclosure and sale is entered, however, the mortgage debt bears interest at the judgment rate – in New York, 9%.  The default rate can survive issuance of the judgment and continue to accrue, but only if the mortgage documents clearly so specify.

The key consideration then is for a case where a high default rate applied, but then will fade away and be replaced by accrual at 9%.  If the note rate or default rate were less than 9%, entry of the judgment increases the interest the obligation bears.  Then, if the foreclosure sale is delayed, it is not to the detriment of the lender.  If, however, the judgment rate of 9% is less than had previously applied, then delay in pursuing the foreclosure sale accrues interest at a rate which might be less palatable.

There is yet another factor as to interest.  Statute (CPLR §5001) provides that in an action at equity (a foreclosure is such an action) the rate of interest can be reduced or eliminated for any period of delay attributable to the foreclosing plaintiff.  [For further discussion and case citations, see, 1 Bergman on New York Mortgage Foreclosures, §2.20(3), LexisNexis Matthew Bender (rev. 2014).]

In any event, the point here is for lenders and servicers to be specifically aware of the relationship of a judgment to the interest it bears.  This can then be consciously considered if delay in setting the sale is contemplated.

DURATION OF A FORECLOSURE JUDGMENT

It doesn’t have one.  This is a surprising and perplexing conclusion.  There is a sense that everything has a life; nothing is eternal.  Indeed, a money judgment as a matter of statute (and case law) is effective as a lien upon real property only for 10 years, although it can be extended.  (It is valid as against personal property for 20 years.)

The vital maxim here, though, is that a foreclosure judgment is not a money judgment – and so does not suffer the same durational infirmity.

All this noted, there remains an inescapable queasiness about keeping a foreclosure judgment inactive.  The thought, or fear, is that eventually, after years, some court will find a way to declare the hoary judgment invalid.  Such an event did occur in a case in Kings County [Bardi v. Estate of Morgan, 17 Misc.3d 927, 847 N.Y.S.2d 431 (Sup. Ct. 2007).]  There it was declared that where a foreclosure auction sale was conducted more than one year after judgment, the notice of sale is deemed invalid.[1]

This is the only reported decision of its kind and it is based on no authority.  It is merely what the judge in that case wanted to do.  It should not be considered as precedent.  Nonetheless, borrowers seize upon the holding and cite it when assailing the legitimacy of older judgments.

Then there is the possible peril of a legal doctrine denominated as “laches”.  Delay or inaction of one party (read lender), detrimentally relied upon by another party (read owner/borrower) can bar enforcement.  There are no cases condemning an old judgment where a borrower relied on the inaction and would suffer if a sale were now based upon that judgment, but it might be imprudent to assume it would never happen.

CONCLUSION

Armed with the knowledge that a foreclosure judgment bears interest at 9%, and that undue delay can result in reduction of interest, foreclosing plaintiffs might feel free as a matter of law to postpone holding a foreclosure sale for as long as it pleases them.  But that at least opens the door for borrowers or other defendants to attack the amount of interest and efficacy of the aging judgment.  While the opinion here is that no law diminishes the validity of even a very old judgment (unless laches can be invoked) lengthy delay can hardly be recommended.

[1] While this case was affirmed on appeal [61 A.D.3d 625 (2d Dept. 2009)], the possible question of a stale judgment was apparently not at issue.

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.