FORECLOSURE OF A MORTGAGE

This monograph concerns the foreclosure of a mortgage pursuant to Article13 of the Realty Property Actions and proceedings Law. That Article provides a procedure with which a mortgagee can obtain a judgment of foreclosure and sale and sell the property encumbered to satisfy the mortgage debt.

I. PARTIES TO A FORECLOSURE ACTION

A. Plaintiffs - All holders of the mortgage must be parties plaintiff, except when one of the mortgage interests refuses to join in the action. He should be made a party defendant and the complaint should contain allegations in support of the joinder. Hancock V. Hancock, 22 NY 563 (1860), 418 Trading Corp. V. Moon Realty Corp., 285 AD 444 (1st Dept. 1955), Frank V. Jaffa, 181 Misc. 517 (S. CT. Queens 1943).

Alternatively, the holder of a junior interest in a mortgage can, if the senior interest refuses to join in the action, elect to foreclose not the entire mortgage but only his interest subject to the senior interest. In such a case the senior interest need not be made a party defendant. Real Property Actions and Proceedings Law (RPAPL), Sec. 1315.

B. Necessary Defendants - A mortgage foreclosure requires that those persons holding liens subject and subordinate to the mortgage being foreclosed be joined in the action. Necessary defendants can include those listed below.

1. Every person having an estate or interest in possession, or otherwise, in the property as tenant in fee, for life, by the entirety, or for years, and every person entitled to the reversion, remainder or inheritance of the real property, or of any interest therein or undivided share thereof, after the determination of a particular estate therein. RPAPL, Sec. 1311(1).

2. Every person having a right of dower or an inchoate right of dower in the real property or any part or share thereof. RPAPL, Sec. 1311(2).

3. Every person having any lien or encumbrance upon the real property which is claimed to be subject and subordinate to the lien of the plaintiff. RPAPL, Sec. 1311(3)

a. "The United States may be named a party in a civil action or suit ... to foreclose a mortgage or other lien upon .. .. real or personal property on which the United States has or claims a mortgage or other lien". 28 USCA Sec. 2410(a).

b. The State of New York may be made a party defendant when it has an interest in or lien on the property subordinate to the lien of the mortgage being foreclosed. The State can, for example, have a lien arising under the Tax Law or under the Lien Law, Sections 246 and 246-a, as to bail bond liens.

Where a judgment has been rendered in favor of an agency of either the State or a municipality, it will be adequate to join the State of New York or such municipality without joining the agency as a party defendant. Appropriate recitals must be contained in the complaint giving the reason for joinder as a party. This is, however, inapplicable to the industrial Commissioner who must be joined as a party. New York State Land Title Association, Recommended Practice No. 23A.

c. The Industrial Commissioner is joined if a warrant was filed under Labor Law, Sec. 573(2), creating a lien on real property for unemployment insurance payments due. RPAPL, Sec. 201.

d. The holder of a Uniform Commercial Code filing that affects a fixture or other real property-related interest must be a party defendant if its interest is subordinate to the mortgage being foreclosed. (See Part XII(D) , "Title exceptions", infra).

e. If the plaintiff in a foreclosure action holds the mortgage as an assignee under a collateral security agreement, the plaintiff can only cut-off the interest of the assignor by making him a party to the action. Bloomer v. Sturges, 58 NY 168 (1874)

4. Where the mortgage is upon any of the public utilities regulated by the Public Service Law, the Public Service Commission must be joined in the action. RPAPL, Sec. 1311(4)

C. Permissible Defendants - Any person who is liable to the foreclosing plaintiff for payment of the debt secured by the mortgage, such as a guarantor of the debt, may be made a defendant in the action, although such joinder is not mandatory. RPAPL, Sec. 1313. Such person should be joined to enable the plaintiff to obtain a deficiency judgment if the proceeds of sale are insufficient to satisfy the mortgage obligation. RPAPL, Sec. 1371. (See Part XI, infra)

D. Representative Defendants

1. When a trust has been created by will or by deed or by declaration of trust, the trustees who shall have duly qualified shall be made parties defendant without naming the trust beneficiaries or the remaindermen as parties defendant RPAPL, Sec. 1312 (1).

2. Whenever the duly qualified executors under a will are made parties defendant, they shall represent all of the legatees named in the will, and their successors and assigns. The legatees need not be joined in the action. RPAPL, Sec. 1312 (2).

II. COMPLAINT

The complaint sets forth a full description of the property being foreclosed and contains certain information and allegations. It must be filed at or before the time of the filing of the This Pendent in the office of the clerk of the county where the affected property is situated.

A. The terms of the note, bond or other obligation, including its date of execution, the face amount, rate of interest and manner of payment,and the mortgage's recording information must be stated.

B. The details of the defaults in payment, including the amounts in arrears, must be stated, and the complaint should allege that the plaintiff declares the entire mortgage due and payable. See RPAPL, Sec. 1351(2) as to partial foreclosures

C. There must be an allegation that no prior action has been brought for recovery of the debt secured by the mortgage, or, if an action had been commenced, that an execution issued to the Sheriff was returned unsatisfied. RPAPL, Sec. 1301.

D. As to the named defendants, it must be alleged that all of the defendants have or claim to have some interest in or lien upon the mortgaged premises, which liens or interests are subject and subordinate to the lien of the mortgage being foreclosed.

E. If any party is a corporation, the complaint shall specify the jurisdiction under the laws of which the party was incorporated. Civil Practice Law and Rules (CPLR) , Sec. 3015 (b).

F. The reasons for making a party defendant any govern-mental entity or subdivision must be stated with specificity. Otherwise, the complaint must be amended, if possible, before judgment is rendered, or the defendant in question must stipulate to be bound by the judgment.

1. United States

a. The complaint shall set forth with particularity the nature of the interest or lien of the United States. 26 USCA Sec. 2410(b). (See Part XII (C), "Title Exceptions", infra)

b. In actions involving a federal tax lien, the complaint must set forth the name and address of the taxpayer whose liability created the lien sought to be cut-off, the identity of the Internal Revenue Service Office which filed the Notice of Lien, and the date and place when and where such notice was filed. 28 USCA Sec. 2410(b).

See Part X(C) (2) (b) (iv) , infra, page 18 as to the right of the United States to redeem property sold at a foreclose sale.

2. New York State

a. The complaint shall set forth detailed facts showing the particular nature of the interest in or lien on the real property and the reason for making the State a party defendant. RPAPL, Sec. 202(l). (See Part XII (C), "Title Exceptions", infra).

b. If the State's lien exists by virtue of a judgment, other than a warrant, the complaint must state the name of the court rendering the judgment, the date the lien was filed, the clerk's office where filed, and the names of the parties against whom and in whose favor the lien was recorded. In the case of a warrant,only the name of the court is to be omitted. RPAPL, Sec. 202(2).

c. If the lien exists by virtue of a provision of law other than a judgment, the complaint must indicate the provision of law under which the lien was created. RPAPL, Sec. 202(3).

3. Cities

a. The complaint shall set forth detailed facts showing the particular nature of the interest in or lien on the real property and the reason for making a city a party defendant. RPAPL, Sec. 202-a (1)

b. If the lien exists by virtue of a judgment, the same requirements as apply to cities detailed in (2) (b) , supra, are applicable. RPAPL, Sec. 202-a. If the lien exists by virtue of a provision of law other than a judgment, the complaint must indicate the applicable law. RPAPL, Sec. 202-a(3).

III. SERVICE OF PROCESS

A. Proof of Service

1. Proof of Service shall specify the papers served, the person who was served, and the date, place and manner of service, and it shall set forth facts showing that the service was made by an authorized person in an authorized manner. CPLR, Sec. 306.

2. When the CPLR requires that certain service be made with "due diligence", the affidavit of service must set forth sufficient factual details of the due and diligent effort made to effect personal service on the defendant being served.

3. Proof of service of the summons and complaint upon each defendant must be filed with the clerk of the court within 120 days after the initial filing of the Summons and Compliant. If the action is dismissed as to a defendant for failure to so file proof of service, a new action may be commenced as against that person within 120 days of such dismissal. CPLR Section 306-b (Chapter 216 of the Laws of 1992, effective 7/1/92).

B. Manner of Service

1. Personal Service upon a Natural Personal may be made as follows:

a. Delivering the summons within the State to the person to be served.

b. Delivery of the summons to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to. be served and by mailing the summons to the person to be served at his last known address.

c. Delivering the summons within the State to the agent for service of process of the person to be served as designated under CPLR Rule 318, which provides that a person may be designated as an agent for service by a writing to be filed in the office of the clerk of.the county in which the principal to be served resides or has its principal office.

d. If service under (a) and (b) , supra, cannot, with due diligence be made, by affixing the summons to the door of either the actual place of business, dwelling place or usual place of abode within the State of the person to be served, and by mailing the summons to such person at his last known residence ("Nail and Mail")

e. Such manner as the court directs if service is impractical under (a), (b) and (d) , above. CPLR, Sec. 308.

2. Personal service upon a Corporation, foreign or domestic, may be made as follows:

a. Delivering the summons to an officer, director, managing or general agent, or cashier or assistant cashier, or to any other agent authorized by appointment or by law to receive service. CPLR, Sec. 311(1). See CPLR Rule 318 and Business Corporation Law(BCL) , Sec. 305 as to designation of an agent for service of process.

Service made upon a purported managing or general agent, cashier or assistant cashier is subject to attack as to the authority of the person served. Accordingly, the foreclosing attorney should resort to service upon the Secretary of State to avoid litigation on the question of service.

b. Delivering the summons to the Secretary of State 5 Office in Albany. The Secretary of State is the agent of every domestic corporation and authorized foreign corporation for service of process. BCL, Sec. 304(a).

c. Service of process upon a foreign corporation not authorized to do business in New York State is governed by BCL Sec. 307.

3. Condominiums - To cut off the lien of possible common charges which accrue after the date that the mortgage being foreclosed is recorded, service is made upon the Condominium's Board of Managers in accordance with the provisions of the applicable Declaration of Condominium.

Real Property Law (FPL) Section 339-n(7) provides that a Declaration of Condominium must contain the name of a person to receive service of process, together with the residence address or address of the place of business of such person, which address shall be within the city, town or village and the county in which the condominium is located.

4. Partnerships - If title is in the partnership name, any partner may be served. It is, however, suggested that all of the partners be served when the partnership owns the property being foreclosed. When title is in the name of individuals doing business as a partner-ship, then each individual must be served. CPLR, Sec. 310.

5. Infants - Personal service upon an infant is to be made by personally serving the summons within the State upon a parent or any guardian or any person having legal custody or, if the infant is married, upon an adult spouse with whom the infant resides, or, if none are within the State, upon any other person with whom he resides, or by whom he is employed. If the infant is fourteen years of age or older, the summons shall also be personally served upon him within the State. CPLR, Sec. 309(a).

6. Incompetents - Personal service upon a person judicially declared to be incompetent is to be made by personally serving the summons within the State upon the committee appointed to manage his affairs and also upon the incompetent unless the court dispenses with service upon the incompetent. CPLR, Sec. 309(b).

7. United States - Service upon the United States shall be made by serving the process of the court, with a copy of the complaint, upon the United States attorney for the district in which the action is brought or upon an assistant United States attorney or clerical employee designated by the United States attorney in a writing filed with the clerk of the court in which the action is brought, and by sending copies of the process and complaint by registered or certified mail to the attorney general in Washington, D.C.

The United States may appear, answer, plead or demur within sixty days after such service or such further time as the court may allow. 28 USCA Sec. 2410(b).

8. New York State - Personal Service upon the State shall be made by delivering the summons to an assistant attorney-general at any office of the attorney general or to the attorney-general within the State. CPLR, Sec. 307.

9. Governmental Subdivisions

a. City of New York- Personal service is made to the Corporation Counsel or to any person designated by him to receive process in a writing filed in the Office of the Clerk of New York County.

b. Any other City - To the mayor, comptroller, treasurer, counsel or clerk.

c. Counties - To the chairman or clerk of the Board of Supervisors, clerk, attorney or treasurer.

d. Towns - To the supervisor or clerk.

e. Villages - To the mayor, clerk or any trustee.

f. School, Park, Sewage or other District - To the clerk, any trustee or any member of the Board. CPLR, Sec. 311.

10. Service Without the State

a. Personal Jurisdiction - A person domiciled in this State or subject to long-arm jurisdiction under CPLR Sec. 302, or his executor or administrator, may be served with the summons outside the State, in the same manner as service is made within the State. CPLR, Sec. 313.

b. In Rem Jurisdiction - Service may be made without the State in the same manner as service is made with-in the State where a judgment. is demanded that the person to be served be excluded from a vested or contingent interest in or lien upon specific real property within the State. CPLR, Sec. 314.

11. Service by Publication

a. The court, upon motion without notice, shall order service of a summons by publication if service cannot be made by another prescribed method with due diligence. CPLR, Sec. 315.

b. The summons is required to be published with a brief description of the property, in two newspapers, at least one of which is to be in English, once a week for four weeks commencing within 20 days from the date of the order. CPLR, Rule 316.

c. Service by publication will not sustain a personal judgment for a deficiency against the person so served. Grubel v. Nassauer, 210 NY 149 (1913)

C. Defense If Summons Not Personally Served - A person served with a summons other than by personal delivery to him or his designated agent for service, within or without the State, who does not appear may be allowed to defend the action within 1 year after he obtains knowledge of the entry of judgment, but in no event more than 5 years after such entry, upon a finding that he did not personally receive notice of the summons in time to defend and has a meritorious defense.

If the defense is successful, the court may direct and en-force restitution in the same manner and subject to the same conditions as where a judgment is reversed or modified on appeal. CPLR, Sec. 317. (See Part XII(B), "Title Exceptions", infra)

IV. LIS PENDENS

A. Filing

1. At least 20 days before final judgment the plaintiff must file in the clerk's office of the county where the property is situated a notice of the pendency of the action. It shall specify the date of the mortgage, the parties thereto, and the time and place of its recording. RPAPL, Sec. 1331.

2. A notice of pendency filed before an action is commenced is effective only if, within 30 days after filing, a summons is served upon a defendant or the first publication of the summons is made pursuant to an order and publication is subsequently completed. If the defendant dies within 30 days after filing and before the summons is served upon him or publication is completed, the notice is effective only if the summons is served upon the executor or administrator within 60 days after letters are issued.

A lis pendens is effective against all defendants if a necessary defendant was served within 30 days. Washington Heights Federal Savings and Loan v. 685A Hancock Street Corp., 41 Misc. 2d 911 (5. CT. Kings 1964)

V. RECEIVER

A receivership is advisable if the action appears to be protracted and rents need to be collected. Where the mortgage provides that a receiver may be appointed without notice, notice of a motion for such appointment will not be required. RPAPL, Sec. 1325. The receiver is the court's officer and he acts for the benefit of all parties. Canale v. New York State Dept. of Taxation, 84 Misc. 2d 786 (Court of Claims 1975)

VI. REFEREE TO COMPUTE

A. Appointment - If the mortgagor fails to answer within the time allowed or the right of the plaintiff is admitted by the answer, the court, on motion, shall determine the amount due or appoint a referee to compute the amount due to the plaintiff and to such defendants as are prior encumbrances of the mortgaged premises. RPAPL, Sec. 1321.

B. Affidavit of Regularity - The plaintiff's attorney on motion for an order to appoint a referee to compute, usually furnishes an affidavit setting forth facts showing the service of the summons and the appearance of defendants.

C. Referee's Report - The referee examines the original instruments, the plaintiff's computation of the principal balance and unpaid interest due to the date of the hearing. The referee’s report should show the balance due on the mortgage for interest and principal and the amounts advanced for taxes and other charges against the premises. The referee should recommend to the court whether the property should be sold as one parcel or otherwise.

VII. NOTICE OF DEFAULT JUDGMENT

Effective January 1, 1978 CPLR Sec. 308 requires that a defendant who is a Natural person be given notice of the intention to enter a default judgment. The foreclosing attorney who seeks to enter the de-fault judgment must, at least 20 days prior to the entry of judgment, comply with the following procedure:

A. Mail a copy of the summons by first class mail, to defendant(s) at his last known address.

B. If the letter is returned as undeliverable prior to the entry of judgment, or if the residence address is unknown, then it will be mailed to the defendant(s) in care of the place of employment, if known, in an envelope marked "personal and confidential", and the envelope may not indicate that the letter is from an attorney or concerns an alleged debt.

C. If no residence or place of employment is known, then it can be mailed to any other known address.

D. An affidavit of mailing executed by the person who did the mailing must be filed with the judgment.

VIII. JUDGMENT OF FORECLOSURE AND SALE

A. Motion - After filing and serving the referee’s report, the plaintiff applies to the court for confirmation of that report and for judgment of foreclosure and sale.

B. Format of Judgment

1. Preamble shows the date of the filing of the lis pendens and the date of the affidavit of regularity.

2. Directs that a sufficient amount of the mortgaged premises be sold to discharge the debt and to pay the expenses of sale and the costs of the action. RPAPL, Sec. 1351(1). If the property can be sold in parcels, the judgment may direct that only a portion of the property be sold to satisfy the debt then due. RPAPL, Sec. 1351(2)

3. To obtain a higher price at sale, the plaintiff may request that the property be sold by a licensed auctioneer (paid by the purchaser at the sale) and also that the court permit advertising in addition to the publication requirements of RPL Sec. 231(2) . The court may have the plaintiff pay for the advertising.

4. The complete description of the property being fore-closed is set forth and the amount due to the plaintiff, with interest due from the date of the referee's report, is determined.

5. The referee is directed to sell the property and to pay out of the sale proceeds any taxes, assessments, sewer and water charges that are liens on the premises.

6. The judgment indicates the liens that the premises will at the date of sale be sold subject to and orders that the defendants in the action, and the persons claiming under them are forever barred and foreclosed of all right, title, claim, lien, interest and equity of redemption in the property.

7. An adjudication must be made as to those parties responsible for a deficiency judgment. Otherwise the plaintiff will be barred from making a motion for a deficiency judgment after the sale. (See Part XI, infra)

8. The sale is conducted in the county where the property is located, but where the property is in two counties, the court should direct the county in which the sale is to take place. CPLR, Sec. 5103(b)

C. Effect of Judgment

1. Adjudicates all questions at issue, Feiber Realty Corp. v. Abel, 265 NY 94 (1934) , and all defenses that might have been put forth.Griffo v. Swartz. 61 Misc. 2d 504 (Co. CT. Monroe, l969).

2. Determines the rights of the plaintiff under the mortgage and the amounts due from the mortgagor.

3. Forecloses a defendant's equity of redemption and extinguishes the subordinate liens held by defendants. Note that when the owners of the equity of redemption have not been served with process or do not voluntarily appear, the purchaser at the foreclosure sale derives no title whatsoever. Hermann v. Cabinet Land Company, 217 NY 526 (1916).

IX. NOTICE OF SALE (RPAPL, Sec. 231)

A. Strict Compliance - Notice of Sale must strictly comply with the statute. At any time within one year after the sale, the court may set aside the sale for failure to comply with the Notice of Sale Requirements or with the requirements as to the time and manner of the sale if a substantial right of a party was prejudiced. RPAPL, Sec. 231(6) . (See Part XII(E), "Title Exceptions", infra, page 22

Notice of Sale shall be given by the officer making the sale by publishing a notice of the time and place of the sale, containing a description of the property to be sold. RPAPL, Sec. 231(2)

B. Procedure

1. All party defendants who did not default in the action, excepting those who waived service of Notice of Sale, must be served with such notice.

2. Notice of Sale must be published either once a week for 4 successive weeks or at least twice a week in each week for three successive weeks preceding the original date for sale. If publication is for three weeks the sale is to take place on any day on or after the twenty-first day and on or before the twenty-eighth day after the day of first publication; if the publication is for four weeks the sale is to take place on any date on or after the twenty-eight day and or or before the thirty-fifth day after the day of first publication.

3. Notice of Sale must be published in a newspaper in the county in which the property is located, or, if there is none, in a newspaper published in an adjoining county, unless the property is situated wholly or partly in a city, or in an incorporated village in which a daily, semi-weekly or tri-weekly newspaper is published, and, in that case, by publishing notice in in such daily, semi- weekly or tri-weekly paper, or in a weekly paper published in such city or incorporated village. However, where the property is located in a county within the City of New York publication is to be in a daily newspaper published within such county.

If the property is situated in a city, or in a village in which no newspaper is published daily, semi-weekly or tri-weekly, and there is an adjoining city or village in the same or another county in which a newspaper is so published, notice may be published in such daily, semi-weekly or tri-weekly newspaper of that city or village, or in a weekly newspaper of such city.

4. Where the property is situated wholly outside a city or, in certain instances, outside an incorporated village, Notice of Sale must also be posted in three public places at least 28 days prior to the sale date. If the sale is to be within the limits of the town where the property is located, posting is limited to that town. If the sale is going to take place in a different town, posting must be done in three public places in both towns involved.

C. Intentionally Deleted

D. Adjournment

1. If the sale is postponed because the referee appointed to conduct the sale does not appear, the plaintiff may postpone the sale for a period not to exceed four weeks, during which time the plaintiff may apply to the court to have another person appointed to make the sale.

Notice of postponement of sale is to be posted at least three days prior to the postponed date in the same places as the original Notice of Sale when posting is required, and it shall be published once at least three days prior to the postponed date in the newspapers in which the Notice of Sale was originally published. RPAPL, Sec. 231(3).

2. If the sale is postponed for any reason other than the referee's failure to appear, full re-compliance with the Notice of Sale provisions must be undertaken.

X. SALE AND CONVEYANCE

A. Sale

1. After judgment of foreclosure is entered, the property is sold at public auction to the highest bidder. RPAPL, Sec. 231(1)

2. Terms of sale must be made known at the sale, and if the property is sold subject to dower rights, or to a charge or lien, that fact shall be declared at the time of sale. RPAPL, Sec. 231(4).

3. If the property consists of 2 or more buildings or lots they shall be sold separately, unless otherwise ordered by the court; but where 2 or more buildings are situated in the same city lot, they shall be sold together. RPAPL, Sec. 231(5).

B. Setting Sale Aside

1. A purchaser at the foreclosures sale will be relieved of his purchase if the title is defective or otherwise unmarketable and the terms of sale do not require taking subject to the matter which makes the title unmarketable. Accordingly, a defect in or encumbrance on title, such as an easement or restrictive covenant, should be declared at the time of the sale. Conlen v. Rizer, 109 AD 537 (1st Dept. 1905)

a. When tenants in possession are not made parties defendant, unless the property is sold subject to the tenants' rights, the purchaser at the sale may be relieved of his bid. Warren's Weed New York Real Property, Volume 2A, "Foreclosure of Mortgage", Section 7.16.

b. The sale may be set aside for fraud or irregularity even as against the bona fide grantee of a purchaser, Dorff v. Borenstein, 277 NY 236 (1938) , Hale v. Clauson, 60 NY 339(1875). See Warren's Weed, Volume 2A, "Foreclosure of Mortgage", Section 15.27 regarding grounds for setting aside a sale.

c. If there is an encroachment on to the property being sold, court may determine that compensation to the purchaser is more appropriate than relieving him of his purchase. McGraw v. Selkis, 245 AD 786 (3rd Dept. 1935) , aff'd 269 NY 534 (1935)

d. The purchaser may not be relieved of his purchase if a subordinate judgment creditor was not made a party defendant if the purchaser was aware of the lien. Mandalino v Levy, 49 Misc. 2d 134 (5. Ct. Kings 1966).

2. The sale may be set aside at the request of anyone whose rights are prejudiced by the sale, not only by request of those who are parties to the action. Accordingly, the shareholders of a corporate defendant can move to have the sale set aside. Goldberg v. Feltman' s of Coney Island, 205 Misc. 858 (S. Ct. Kings 1954)

The application to set aside the sale should, however, be done promptly. Homeowner's Loan Corporation v. Margolis, 168 Misc. 945 (S. Ct. West. 1938)

3. The terms of sale may provide that if the purchaser fails to take title, the property may again be put up under the same terms without application to the court. Otherwise, leave of court must be obtained. On a resale the proceedings are de novo as though the the first sale had never taken place. Warren's Weed, Volume 2A, "Foreclosure of Mortgage", Sece. 15.26 and 15.28.

C. Conveyance

1. Purchaser's Title

a. The foreclosure deed vests in the purchaser the entire interest and estate of the mortgagee and the mortgagor, as of the date of the mortgage, unaffected by sub-sequent or intermediate acts, encumbrances or conveyances of the mortgagor, if the mortgagor and the other interests were properly served. Hope v. Shevill, 137 AD 86 (2nd Dept. 1910) , aff'd 204 NY 563(1912), Frensdorf v. Stumpf, 30 NYS 2d 211 (S. Ct. Onandaga 1941)

b. Title to personal property does not pass on a foreclosure sale excepting fixtures annexed to the freehold estate.

c. The mortgagor may remove the building on the property when permitted by the foreclosure judgment and recited in the Notice of Sale if the buildings are not covered by the lien of the mortgage. Eichhammer v. Parsons, 273 NY 208 (1977)

2. Encumbrances - A purchaser takes subject to prior encumbrances.

a. A purchaser having a paramount title is not cut off by the conveyance unless he is made a party to the action, the plain-tiff defeats his alleged prior claim to the property or the judgment decrees that the amount of the prior encumbrance be paid out of the sale. Jacobie v. Mickle, 144 NY 237 (1894). The terms of the sale should direct what is to be done with prior encumbrances even if the judgment of foreclosure and sale is silent on that point. Luker v. Fitzer, 107 Misc. 308 (Co. Ct. Oneida 1919).

b. If the property is sold subject to a prior mortgage, the purchaser is obligated to pay accrued interest on that mortgage up to the closing of the foreclosure sale.

c. An option to purchase in a lease created prior to the mortgage lien will not be cut off by the foreclosure.

d. A subordinate encumbrance is barred by the foreclosure.

e. Only persons who are made parties by being duly served or by their appearing in the action, despite improper service, may have their rights barred by the foreclosure judgment and sale. Gage v. Brewster, 31 NY 218 (1865)

f. The junior lien is transferred to the surplus money, if any. (See Part X(D), infra).

g When a senior mortgage has been foreclosed without making a junior mortgagee a party to the suit, the junior mortgagee may redeem by paying the mortgage debt, principal and interest without paying the cost of the previous foreclosure. To remove the possibility of redemption by a lienor, or another person in interest, who was not made a party defendant, the property should be re-foreclosed pursuant to Sec. 1352 of the RPAPL. See Vought v. Levin, 142 AD 623 (1st Dept. 1911)

h. The federal priority of lien statute, 26 USCA Sec. 6323, of the Federal Tax Lien Act of 1966, governs the priority of a mortgage relative to a lien for federal taxes. The statute has incorporated the judicial standard of "choateness" by which the priority of specific and perfected liens is to be determined by the rule that "the first in time is the first in right". United States V. R.F. Ball Construction Corp., Inc., 355 US 587 (1958).

Although a mortgage foreclosed may have priority over a federal tax lien, and the government's lien is therefore cut off, the United States retains a right to redeem the property within 120 days from the date of sale. The United States has one year to redeem the property when it holds a lien such as a money judgment or a junior mortgage. (See Part XII (F) , "Title Exceptions", infra).

Note, however, the Housing Act of 1950 (12 USCA Sec. 1710 K) providing that the right to redeem shall not arise in any case in which the sub-ordinate lien or interest of the United States derives from the issuance of insurance under the National Housing Act, as amended, or the issuance of guarantees of insurance under the Servicemen's Readjustment Act of 1944, as amended.

3. Taxes

a. Unless the plaintiff and purchaser is a municipal corporation, the officer conducting the sale pays out of the sale proceeds all taxes, assessments, and water charges which are liens on the property sold (RPAPL, Sec. 1354(2). The referee also redeems the property sold from any sales for unpaid taxes, assessments or water charges when they apparently have become absolute. Outside of New York City the judgment can direct that the property be sold subject to all taxes, assessments and water charges.

b. Payment of the taxes is made out of the purchase money, or the purchaser may deduct the amount of outstanding taxes from the purchase price. For the referee to pay the outstanding taxes, there need not be a provision in the mortgage that the mortgagor is to pay them. Shaw v. Youmans, 105 AD 329 (3rd Dept. 1905)

c. The referee cannot be compelled to pay the taxes if the plaintiff and the purchaser waive payment of taxes. Morgan V. Fullerton, 9 AD 233 (2nd Dept. 1896)

D. Referee's Report of Sale

1. The officer conducting the sale is to pay, out of the proceeds, unless otherwise directed, the expenses of the sale and pay to the plaintiff the amount of the debt, interest and costs, or so much as the proceeds will pay and take the receipt of the plaintiff for the amount paid, and he should file that receipt with his report. RPAPL, Sec. 1354(1).

2. The Report, which contains an affidavit of regularity, includes details of the sale, proof of publication of Notice of Sale and the sale of the property, and it should indicate the amount of surplus monies, if any.

3. All surplus monies are to be paid into court by the officer conducting the sale within five days after the funds are received. RPAPL, Sec. 1354(3). Any person claiming surplus monies (subordinate lienors) should file with the Clerk an appropriate notice of claim. If the claim is confirmed the court will list the priority of the liens seeking to obtain surplus monies. The surplus monies are paid to the lienor on confirmation of the report of sale.

XI. DEFICIENCY JUDGMENTS

A. If a person who is liable to the plaintiff for payment of the debt secured by the mortgage is a party defendant, and if he has been personally served or has appeared in the action, the final judgment may award payment by him of the whole, or part, of the debt remaining unsatisfied after a sale of the mortgaged property and the application of the proceeds. RPAPL, Sec. 1371(1)

B. The plaintiff should move for a deficiency judgment when moving for an order to confirm the sale, providing such motion is made within 90 days after the delivery of the deed to the purchaser. Notice of motion is to be given to the party against whom the deficiency judgment is sought or the attorney who represented that party in the foreclosure. Notice is to be served personally or in such other manner as the court directs. RPAPL, Sec. 1371(2)

C. The amount of the deficiency judgment is to be equal to the amount owing by the party liable as determined by the judgment with interest plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fees and disbursements, less the market value, as determined by the court, or the sale price of the property, whichever shall be higher. RPAPL, Sec. 137l(2)

If the property is purchased by the plaintiff, the market value of the property is subtracted to deter-mine the amount of the deficiency judgment. Warren's Weed, Vol. 2A, "Foreclosure of Mortgage", Sec. 17.14.

D. If plaintiff fails to move for a deficiency judgment, the sale is deemed in full satisfaction of the mortgage debt and the plaintiff has no right to any form of future recovery. RPAPL, 1371(3)

XII. TITLE EXCEPTIONS

A. Bankruptcy Code

1. "The Bankruptcy Reform Act of 1978, 11 USC Sec.362 provides for an automatic stay of all judicial proceedings against a debtor who is the subject of a petition filed in the Bankruptcy Court. Policy to be issued pursuant to this report will except any loss or damage by reason of the stay".

2. "No Bankruptcy searches have been made in the office of any federal court not located in the county in which the property is located (See RPL, Sec. 297-a and Rule 602, Bankruptcy Code)".

Note that a party in interest can request that the Bankruptcy Court, after notice and a hearing, grant relief from the stay by terminating, annulling, modifying or conditioning such stay. Reference should be made to 11 USCA Sec. 362(d)

B. Service of Process - When service is made by other than personal delivery, the following exception will appear in the report and policy:

"The defendant hereinafter named was served in the action mentioned by means other than by personal delivery of the summons. This policy does not insure against any rights the said defendant may have under CPLR Sec. 317.

Defendant: _______________________________________________
Action - Plaintiff: ___________________________________
Defendants: _______________________________
Court: __________________________________________________
Index No.: _________________________________________
Object of Action: _____________________________________

This exception will be passed (by the title insurer) when asked to insure a subsequent purchaser or mortgagee provided that no motion to open the default of such defendant is pending".

C. Pleadings

1. "In making the United States of America a party defendant, the complaint must set forth with particularity the nature of the interest or lien of the United States on such property".

2. "In making the State of New York a party defendant, the complaint must set forth detailed facts showing the particular nature of the interest or lien as required by RPAPL Sec. 202".

3. "Attention is called to the provisions of the Soldiers and Sailors Civil Relief Act in effect since 8/27/40 and amendments thereto, and the provisions of the same must be complied with". 50 USCA Appendix Sec. 501 et seq. See also New York State's Military Law, Sec. 312".

D. Uniform Commercial Code

"Company does not guarantee that the holder of a UCC shown herein (as a necessary party defendant) and the lien or interest represented thereby can be effectively cut off by the proposed foreclosure. Plaintiff's attorney should consider the advisability of joining such holder as a party defendant (UCC Sec. 9-313), and if so joined there must be a clear tender of the issue in the complaint".

"Policy will except any such UCC, unless after completion of the foreclosure action, Company is satisfied that the UCC has been effectively cut off".

E. Notice of Sale - On certifying title in the referee after the entry of judgment, the following title exceptions are raised.

1. "Proof is required of the publication of Notice of Sale in conformity with the provisions of Section 231 of the Real Property Actions and Proceedings Law, and of the filing of the Referee's Report of Sale".

2. "Proof required of the Publication of Notice of Sale (and of Posting) in conformity with the provisions of Section 231 of the Real Property Actions and Proceedings Law, and of the filing of the Referee's Report of Sale".

3. "Proof required of the Service of Notice of Sale upon all defendants who have appeared and demanded such service as follows: _________________________________

4. "Proof required of the Service of Notice of Sale (and a copy of the Judgment with Notice of Entry) upon all defendants who have appeared and demanded such service as follows: _______________________________________

F. United States - "Right of the United States to redeem within one year (or 120 days if a federal tax lien) of the date of the foreclosure sale After the redemption period has expired, this exception can be omitted if no "Certificate of Redemption" was recorded in the register's or clerk's office by the United States and the attorney and the owner of the property furnish an affidavit that no redemption has been made by the United States. 28 USC Section 2410. See also 26 USC Section 7425.

 

By: Michael J. Berey
Senior Underwriting Counsel and Vice-President
First American Title Insurance Company of New York