The Perils Of Being A Mortgagee-In-Possession

While the new case which elicits this alert is a bit odd, it is not so unusual and therefore necessitates an important warning.  [Allen v. Echevarria, 128 A.D.3d 738, 11 N.Y.S.2d 170 (2d Dept. 2015).]

Lenders and servicers will readily recognize that if they wish to take control of mortgaged property, they will do so through the appointment of a receiver.  But there is an alternative path, that being to become a mortgagee-in-possession whereby the lender or servicer itself assumes control of the property.  While this is typically not recommended, if there is adequate insurance protecting the lender or servicer it is something which can be considered.  In the new case cited though, it appears that possession was tacitly foisted upon the lender and that is what led to a liability claim – and the clear warning which emerges.

The concededly strange facts here were that a mortgaged property shared a party wall with an adjacent parcel owned by a person who eventually became the plaintiff in this action (“plaintiff”).  Apparently during the course of a bankruptcy filed by the borrower, that borrower surrendered his property to the bank.  That would make the bank a mortgagee-in-possession.

Thereafter, a fire caused damage to the property which then remained in that damaged condition for a number of years.  The consequent deterioration of the mortgaged premises during those years caused the damage to the adjoining parcel which led the plaintiff to start the action asserting, among other things, claims for nuisance, negligence and trespass.

While the bank argued that it was not a mortgagee-in-possession and moved to dismiss the action, the court found that there could not be a demonstration of no factual basis at all for the claim of mortgagee-in-possession.  Therefore, the action survived a motion to dismiss.  What will happen in the end is of course not known, but the bank is in the middle of a lengthy action.

The applicable legal principle was that if the bank was in fact the mortgagee-in-possession, it was bound to employ the same care and supervision over the mortgaged premises that a reasonably prudent owner would exercise as to his own property.  As such, the bank was bound to make reasonable and needed repairs and was responsible for any loss or damage occasioned by willful default or gross negligence in this regard.  It is apparent that such an obligation was a surprise to the bank, although whether it actually was a mortgagee-in-possession remains a mystery.  If it is demonstrated that it was, liability will be imposed.  If it shown that it is not a mortgagee-in-possession, then it will have suffered “only” the legal expense in defending the action.

How a bank avoids a tacit claim that it is a mortgagee-in-possession is an elusive contemplation but worthy of attention any time there is an attempt by a borrower to “turn over” property to a lender or servicer.  If a lender does affirmatively become a mortgagee-in-possession, that it has substantial obligations to maintain the property is a lesson well worthy of emphasis.

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.