Court: Lenders get first lien on defaulting condos.

An Appellate Division court has upheld a lower court ruling giving a lender the first lien on a defaulting condominium owner's units. The First Department panel ruled the condo was not entitled to prior 'arrearages before the lender's claim. In this case, the Park Avenue condo unit owner owes the lender, Banker's Trust, more than $4 million on two units, while the condo is about $70,000

"The lien is going to get wiped out," said Gary M. Rosenberg, a Rosenberg & Estis partner who handled the case for the condo at 900 Park Avenue. "If they had foreclosed and sold the thing fine, but it's been going on for two years."

Rosenberg does not believe the units in question are worth a million dollars now. "They will wipe out the condo and all the owners are going to have to pay for it,"

Under the court's decision, he said, a bank has no reason to rush a foreclosure since its only costs before the foreclosure would be the real estate taxes. Unit owners are responsible for their own property tax payments and in this case the bank did pay nearly $100,000 to the City of New York to maintain its rights to the units. Meanwhile the bank could wait until the market improved before foreclosing and selling the units.

In this market, Rosenberg said, the decision means that condos with defaulting owners will not receive any payments at all. "Condos will be subsidizing all foreclosures," he said.

While cooperative corporations are able to obtain a first lien on arrearages through their recognition agreements with lenders, this is the first case that challenged to the Appellate Division level the rights of the lender foreclosing on a condominium unit.

"I'm thrilled by the decision," said the lender's attorney, Joel David Sharrow. "it has great import for all banks which have outstanding unpaid liens on condos. I quite honestly believe it's the correct decision." Shatrow, of counsel to Moses & Singer, represented Bankers Trust in this case against the Board of Managers of 900 Park Avenue.

Frederick K. Mehlman, the former head of the real estate financing department of the New York State Attorney General's office and a partner in Wolf Haldenstein Adler Freeman & Herz which submitted an amicus brief on behalf of the Council of New York Cooperatives, said the priority in condominiums would now go to the lender and not the condominium for common charges upon a foreclosure.

"Condominiums are facing real problems as a result of these individual defaults because the chances are the person defaulting has also defaulted with the bank," he said.

Sharrow said the lower courts have decided five cased in favor of the boards and 14 in favor of the lenders. As far as he knew, he said, this was the first case which looked to both the legislative history and the legislator's intent.

Sharrow, who was once a State Sen- ator's aide, said he was able to research

the legislative history and provided it to the court. "It is consistently and unanimously in favor of the lenders, "he noted. The opinion, Sharrow said, "is a very firm and strongly written opinion, and picks up the legislative history."

The condominium law was signed in 1964 and has been amended several times.

Mehlman said this is an area in which the legislature need to to act. "The justes really pointed their fingers sqaurely at the legislature and said 'this is an issue, this is a problem, do something about it.' I think there are arguments on both sides.

"From a policy point of view, certainly," Mehlman continued, "the rights of the condominiums need to be protected. I think on the language of the statute, the argument was very, very difficult for the condominium here and it indicates the legislature needs to do something. And there is discussion underway [in the legislature] about giving the condominiums some limited form of priority, for example, for a six month period of time and then letting the lenders' rights kick in."

Rosenberg noted there are a number of bills already pending in Albany to clarify this situation. "But what if a sponsor owns 20 apartments in a building [and defaults]? In a co-op you know what you are buying and can protect yourself and the law provides the bank has .to pay the common charges. Here we have no protection while the bank can protect themselves."

Meanwhile, Rosenberg said they are reviewing the decision with the client and exploring an appeal.' "It is a situation which is going to be punitive to condos in this market and we hope we get leave to appeal."

The owners of the two condominium units in question had been in arrears to the condo for more than $50,000 when it was asked to approve a sublease, against the building's own rules. Shatrow said the building documents state the board must take prompt action once a unit owner is in default for more than 30 days, and it did not do so. The managers also did not collect the arrearages at the time of the sublease, he said, although the owner was being paid "up front" and had the money.

For the condominium managers, Sharrow warned, "This case means a great loss of money and they cannot sit back and wait. This is to motivate boards to act promptly."

"Everybody thought that condos were so much safer because you were inde pendent of your neighbor," Rosenberg added. "Not any more."