First American Title Insurance Company
of New York
228 East 45th Street, New York, New York 10017
FORECLOSURE OF A MORTGAGE BY POWER OF SALE
The former, little used Article 14 ("Foreclosure of Mortgage By Advertisement") of the Real Property Actions and Proceedings Law ("RPAPL") has been replaced effective July 7, 1998 by a new Article 14 ("Foreclosure of Mortgage by Power of Sale"). New Article 14 is an expedited procedure for the non-judicial foreclosure of mortgages on real property. Although most mortgage foreclosures will be conducted judicially as before under RPAPL Article 13, there will be power of sale foreclosures under Article 14, particularly when a proceeding is uncontested or commenced as part of a workout. This memorandum is a summary of the new procedures.
In brief, the foreclosing mortgagee must file a notice of pendency, give service of a notice of intention to foreclose, file proof of the service or mailing of that notice, and publish a notice of sale. Sale is to be at auction and a report of sale is filed. There is a right to redeem by payment prior to commencement of the biding at sale. There is a statutory form of power of sale deed. The foreclosure can be converted to a judicial proceeding under Article 13.
Article 14 is to be in effect until July 1, 2001 and it will apply to proceedings under the Article in which the notice of pendency is filed prior to that date.
I. PREREQUISITES
A. Article 14 can not be used if the mortgaged real property is improved solely by any of the following:
1. Residential building containing less than six dwelling units
2. Residential condominium unit or a residential cooperative building
3. Building in New York City containing 65% or more residential tenancies
4. Building containing residential apartments when the mortgagee will foreclose, terminate, modify or impair" any tenant’s possessory rights
(RPAPL Section 1401)
B. The mortgage must have a provision that on default the mortgagee has the right to sell the property by power of sale (or other non-judicial means) in a non-judicial proceeding when:
1. A default has occurred and the indebtedness has been declared immediately due and payable by written notice to the mortgagor
2. An action has not been brought on the debt or to foreclose the mortgage under RPAPL Article 13, or if an action on the debt was brought it was discontinued or dismissed without prejudice, or execution of a judgment rendered was returned wholly or partially unsatisfied
3. The mortgage was recorded in the county in which the property was situated
4. The first notice of sale is published within the time in which an action can be commenced to foreclose
(RPAPL Sections 1401, 1412 and 1421)
C. The power of sale foreclosure can be converted to a judicial proceeding under RPAPL Article 13 in the following instances:
1. If the mortgage being foreclosed was executed prior to July 7, 1998, the mortgagor may by written notice to the mortgagee require the proceeding to continue judicially under Article 13. The notice must be delivered to the mortgagee by registered or certified mail, or by another method specified in the mortgage, with the postmark not later than 40 days after the mortgagor receives notice of intention to foreclose.
2. If the mortgage being foreclosed, or any extension, amendment, modification or consolidation of a mortgage executed prior to July 7, 1998, was executed after that date, the mortgagor must obtain an order from the supreme court of the county in which the mortgaged property is located directing that further proceedings be conducted under Article 13.
Application for such order must be made no later than 40 days after the date of receiving notice of intention to foreclose. The order can be granted on allegations that the mortgage does not allow for a non-judicial foreclosure, that the mortgagor has a meritorious defense, or that under the facts and circumstances allowing an Article 14 foreclosure would cause undue hardship to the mortgagor.
(RPAPL Section 1421)
II. COMMENCING THE ACTION
A. NOTICE OF PENDENCY
1. Filing of the notice of pendency prior to service of the notice of intention to foreclose, in each county in which the mortgaged property is situated, constitutes commencement of the non- judicial proceeding. The notice is effective for three years from filing and can be extended by the court for an additional three years for good cause shown. While the extension is required to be filed and indexed before expiration of the notice, it can be extended even after expiration of the notice on a showing that no person or entity will be prejudiced by the failure to timely file an extension of the notice.
2. In addition to meeting the requirements of Civil Practice Laws and Rules Article 65, the notice of pendency must specify the object of the proceeding and the following:
a. Parties to the mortgage
b. Date of and recording information for the mortgage
c. Names of the record owner of the mortgaged property, and of the holders of any subordinate interests entitled to notice of sale
d. Description of the mortgaged property, including the tax block and lot
e. County in which the sale is to take place if the property is located in more than one county
(RPAPL Section 1403)
B. NOTICE OF INTENTION TO FORECLOSE
1. No later than 10 days after filing the notice of pendency, a copy of the notice, together with a Notice of Intention to Foreclose is to be personally served, or sent by (i) registered or certified mail and (ii) ordinary first class mail to the:
a. Mortgagor, the owner of the property and an obligor on the debt, if other than the mortgagor, and
b. The holder of any lien recorded against the mortgaged property and the holder of any subordinate interest of which the mortgagee has actual knowledge
2. The notice is required to set forth:
a. The parties to the mortgage, the date of and recording information for the mortgage, and identify any recorded amendments to the mortgage
b. The amounts due, the due dates, and the amount of any late charges and default interest for a monetary default, or the basis for any non-monetary default
c. That a demand to cure the default (if required under the mortgage) has been made and the default has not been cured, and that the mortgagee has declared the entire obligation secured to be immediately due and payable by written notice to the mortgagord.
d. The outstanding principal balance declared due and payable, the amount of interest accrued thereon, and the approximate amount of other sums secured by the mortgage
e. That the interest of the mortgagor and those having subordinate interests served with a copy of this notice and other notices required to be served will be terminated by the foreclosure and that those having subordinate interests may thereupon be evicted by judicial process
f. The right of a the mortgagor and any person or entity with a subordinate interest to surplus monies, and that the mortgagee may seek a deficiency judgment
g. The rights and remedies, as specified in Section 1421, available to the mortgagor, and to any person or entity claiming under the mortgagor or having a subordinate interest or lien, including the following:
(i) The mortgagor can petition the court to have the foreclosure changed under certain circumstances to a judicial proceeding
(ii) An interested party other than the mortgagor may petition the court for injunctive relief under CPLR Article 63
h. Where the United States, the State of New York, or any municipality, agency or instrumentality of either of them is entitled to notice, the nature of the interest or lien of the governmental entity which it must specify with particularity. In connection with an interest of the United States, see the notes below under "Effect of the Sale".
3. Affidavits of service or mailing of the notice of intention to foreclose must be filed prior to the date of sale in the action under the index number purchased in the county clerk’s office in the county in which the sale is to take place when the notice of pendency was filed.
(RPAPL Section 1402)
III. NOTICE OF SALE
A. CONTENTS OF THE NOTICE OF SALE
1. Names of the mortgagor and the record owner, if not the same, the mortgagee and each assignee
2. Date and recording information for the mortgage and each assignment
3. Names and the nature of the interests of the holders of subordinate interests of record and of which the mortgagee had notice at the time of the filling of the notice of pendency
4. Amounts due under the mortgage at the time of first publication of notice
5. Legal description, street address and tax identification of the property
6. If applicable, the order in which the mortgaged parcels are to be sold
7. Right of the owner to redeem up to and including the date of sale
8. The date, place and time of sale
(RPAPL Section 1403)
B. SERVICE OF THE NOTICE OF SALE
1. Delivery and Mailing
a. Service of a copy of the notice of sale is required to be made on the mortgagor, the owner and the obligor if other than the mortgagor, any other person or entity the mortgage requires be served, and any person with a lien or other interest in the mortgaged premises whose interest was subordinate at the time of filing the notice of pendency.
(i) Service is to be made by delivering a copy of the notice and mailing an additional copy by first class mail at least 30 days before the date of sale. The envelope must bear the legend "personal and confidential" and it cannot indicate that it is from an attorney or relates to a legal action.
(ii) If the person being served is a foreign corporation or is not a resident within the state, service may be made without the state at least 40 days before the date of sale
(iii) Service can be made on the mortgagor, its successors and assigns in the manner prescribed in the mortgage
(iv) Service on the United States, it agencies or instrumentalities is to be in accordance with federal statutes
b. Affidavits of service or mailing of the notice of sale are to be filed prior to the date of sale under the index number of the action in the office of the county clerk of the county in which the sale is to take place
2. Publication
a. RPAPL Section 231 is not applicable to Article 14
b. A copy of the notice of sale must be published in a newspaper of general circulation in the county in which the property is situated either at least once in each week during five successive weeks immediately preceding the sale, or at least twice in each week during the four successive weeks immediately preceding the sale.
When the property is located in New York City notice of sale is to be published in the same manner as a notice of judicial proceeding in a newspaper within the county designated by the county clerk.
c. A copy of the notice of sale must be filed in the action on or before the first publication of the notice.
(RPAPL Sections 1405 and 1406)
IV. THE SALE
A. SCHEDULING THE SALE
1. If publication of the notice of sale is for four weeks the sale is to take place on any day on or after the 28th day and on or before the 35th day after the date of the first publication.
2. If publication of the notice of sale is for five weeks the sale is to take place on any day on or after the 35th day and on or before the 42nd day after the date of the first publication.
3. The sale may be postponed by the mortgagee for a period not to exceed five weeks. Notice of postponement of the sale is to be published at least once not less than five days prior to the new date of sale in the same newspaper in which the original notice was published. Notice of the postponed sale must also be served on each person or entity receiving the original notice of sale and in the same manner.
B. CONDUCTING THE SALE
1. The sale is to take place during reasonable business hours, on a weekday other than a holiday, in a courthouse in the county in which the property is located, and at the courthouse of the supreme court of the property in which the property is located if in New York City.
2. The sale is to be a public auction conducted by a licensed auctioneer, sheriff, marshal or official appointed by the court to conduct the sale.
3. The holder of the mortgage being foreclosed can bid up to the full amount of the indebtedness secured, including unpaid interest, late charges, cost of sale, reasonable attorneys’ fees and disbursements, and advances made to protect the lien of the mortgage.
4. A memorandum of sale is to be executed by the person conducting the sale and the successful bidder.
5. The successful bidder if other than the mortgagee will lose its deposit and the property can be resold if the bidder fails to complete the transaction within thirty days of the date of the deposit.
C. EFFECT OF THE SALE
1. Except for the interest of the United States and residential tenants protected under Article 14, the sale, immediately on execution of the memorandum of sale by the person conducting the sale, bars any claim or equity of redemption of:
a. The mortgagor and his or her heirs, devisees, executors, administrators, successors or assigns
b. Each person claiming under the a person in item (i) upon whom notice of sale was served
c. Each person whose interest was not recorded or filed at the time of filling of the notice of pendency
d. Each person claiming under a statutory lien or encumbrance recorded or filed subsequent to the filling of the notice of pendency
2. If noticed in accordance with the procedures contained in 26 USC Sec. 2410 the United States, as a party defendant in a judicial proceeding to foreclose, has the right to redeem within one year (or 120 days if its interest is a federal tax lien) of the sale. Article 14 therefore provides that the sale is to be deemed equivalent to a sale under Article 13, which is a judicial sale. In addition, when the United States, or its agency or instrumentality, holds a subordinate interest or lien of record and is entitled to notice, the mortgagee, after the time for the United States to appear has expired, can obtain an order from the supreme court of the county in which the sale is to take place foreclosing the lien or interest of the United States.
"Upon such order, the sale shall be deemed to be a judicial sale foreclosing the lien or interest of the United States subject to its rights under applicable statutes".
V. CONTESTING THE FORECLOSURE
A. At any time within one year after recording of the deed to the successful bidder, "but not thereafter", a court may set aside the sale "for failure substantially to comply" with the requirements as to notice, time, manner and publication of the sale if the court finds that such failure prejudiced a substantial right of a person or entity whose rights were barred by the sale.
B. If the sale was made to a bona fide purchaser, other than the mortgagee, or its nominee or assignee, without notice of any irregularity in the sale, the sale is not to be set aside without restitution to the purchaser of the purchase price paid.
C. "Any person entitled to receive notice to foreclose or notice of sale under this Article may recover from the mortgagee any damages caused by the failure of the mortgagee to comply with the procedures and conditions set forth in this Article".
(RPAPL Sections 1407 – 1411, and 1421)
VI. RIGHT OF REDEMPTION
A. At any time before commencement of the bidding at the sale the mortgagor, record owner if different than the mortgagor, or the holder of any subordinate lien on the property, may prevent the sale by payment of all sums due to the mortgagee.
1. The person or entity redeeming can require the mortgagee to assign the indebtedness and the mortgage to any person other than the mortgagor or its nominee. The assignment is to be deemed to be the assignment of a bona fide obligation under Real Property Law Section 275. A Section 275 affidavit must be submitted on recording the assignment.
(RPAPL Section 1410)
VII. CONVEYANCE OF THE PROPERTY
A. The form of the deed required to be executed by the person conducting the sale is included as Exhibit A to this memorandum.
B. A memorandum of the sale is required to be annexed as an exhibit to the deed.
(RPAPL Section 1412)
VIII. REPORT OF SALE
A. CONTENTS OF REPORT
1. Within 15 days after completing the sale and executing the power of sale deed, the person conducting the sale is to make a report of the sale. The report is to include the following:
a. Copy of the notice of sale and an affidavit of publication of the newspaper in which it was published
b. Copy of the affidavit(s) of service of the notice of intention to foreclose and the notice of pendency
c. Terms of sale and the memorandum of sale
d. Mortgagee’s affidavit as to the amount claimed due to it, including the costs and expenses allowed it under RPAPL Section 1417
e. Statement as to the time and place of the sale, the sum bid, the name of the purchaser, the amount of the proceeds of sale and the name of each person, entity, court officer or other officer to whom the proceeds of sale were paid
f. Statement of the amount claimed due by the mortgagee, the amount distributed to the mortgagee pursuant to RPAPL Section 1413, the mortgagee’s receipt for the amount paid to it, and the amount of the remaining deficiency or surplus
B. FILLING OF REPORT
1. The Report of Sale with the required affidavits is to be filed in the file for the action in the county clerk’s office in the county where the sale took place within 30 days after delivery of the power of sale deed.
2. The Report as filed is presumptive evidence of the facts stated therein with respect to any mortgaged property in that county.
(RPAPL Sections 1413 - 1415)
IX. PROCEEDS OF SALE
A. ORDER IN WHICH PROCEEDS ARE DISTRIBUTED
1. First, to the payments of taxes, water and sewer charges, assessments that are a lien on the property, and any municipal liens with priority over the mortgage;
2. Then, to the mortgagee’s for its costs and expenses of sale pursuant to RPAPL Section 1417,
3. To the mortgage for the amount of the debt, accrued interest, late charges, and other sums recoverable under the mortgage to the extent allowed by the amount of the proceeds,
4. To the county treasurer for the county in which the sale took place, and
5. After entry of an order under RPAPL Section 1418, to those entitled to surplus monies.
B. APPLICATION FOR SURPLUS MONEY
1. A person or entity claiming surplus monies may file a written notice of claim within 20 days of the filing of the report of the sale in the action in the county clerk’s office in the county where the sale took place.
2. Upon such application, or within three months thereafter, on notice to all persons or entities served with the notice of sale or having filed claims to the surplus monies, the court is to order distribution by the county treasurer of the surplus monies.
(RPAPL Sections 1413 and 1418)
X. DEFICIENCY JUDGMENT
A. Application for a deficiency judgment can be made within 90 days after delivery of the power of sale deed to the supreme court of the county where the sale took place under the index number obtained for the non-judicial proceeding
B. The court is to determine on notice the amount of the deficiency judgement which is to be an amount equal to the aggregate amounts due the mortgagee as set forth in the Report of Sale, less the higher of the:
1. Market value of the mortgaged property as of the date the property was bid at auction (or such nearest earlier available date) as determined by the court by appraisal or as it otherwise directs, or
2. Sales price at the public sale
C. When the mortgaged property consists of more than one separate and distinct parcel and those parcels are to be sold separately, the sale of a subsequent property is not to be scheduled unless a deficiency is determined.
(RPAPL Sections 1416 and 1419)
XI. RECEIVER
If the mortgage being foreclosed provides for appointment of a receiver, the mortgagee can apply after filing of the notice of pendency for the appointment, to the supreme court of the county in which the sale is to take place under the index number obtained for the non-judicial proceeding. Notice of application is not required if the mortgage either provides that a receiver can be appointed without notice or contains the covenant contained in Real Property Law Section 254(10).
(RPAPL Section 1420)
Exhibit A – Power of Sale Deed
Michael J. Berey
Senior Underwriting Counsel and Vice-President
First American Title Insurance Company of New York
August 10, 1998
EXHIBIT A
POWER OF SALE DEED
This deed, made as of the ______ day of ____________, _________ , between __________________ , in the capacity of auctioneer/sheriff/marshal/referee , having an office at ______________ , _________________ , New York ("Grantor") and _________________ , a _____________________ having an address at __________ ,___________________ , ____________________ ("Grantee"),
WITNESSETH
That ________________ ("Mortgagee"), the owner and holder of the mortgage described in Exhibit A attached hereto encumbering the property described hereinbelow (the "Property"), and the note, bond or other obligation secured thereby, has foreclosed the lien of said mortgage pursuant to Article 14 of the Real Property Actions and Proceedings Law of the State of New York;
That Grantor has been designated by mortgagee or by the court in the county in which the sale has taken place to conduct the sale of the Property;
That the sale was duly held on ___________ , _____ , and the Memorandum of Sale attached hereto as Exhibit B was executed at the conclusion of that sale;
And that pursuant thereto, in consideration of ___________ Dollars ($________ ) paid by grantee, being the highest sum bid at the sale, Grantor does hereby grant and convey to Grantee:
(Legal Description of the Property)
Together with all right, title and interest, if any , of the Grantor in and to any streets and roads abutting the above-described premises to the center lines thereof;
Together with the appurtenances and all the estate and rights of the Grantor in and to said premises;
To have and to hold the premises herein granted to the Grantee, the heirs or successors and assigns of the Grantee forever.
IN WITNESS WHEREOF, Grantor has hereunto set the Grantor’s hand and seal the date first above written.
(Acknowledgment)