Who is responsible for maintenance of a property during foreclosure proceedings?

The responsibility for damages to property during the pendency of a foreclosure action was considered in the case of Trustco Bank, National Association v. Eakin (681 N.Y.S.2d 410). None of the parties involved in foreclosure proceedings - the property owner, the foreclosing bank, nor the court-appointed receiver - made the property secure so as to avoid vandalism.

Robert Eakin and Christine Eakin contracted to sell their two three-story walk-up apartment buildings in Troy, NY for $160,000. The transaction, however, never closed, and shortly thereafter the Eakins defaulted on the mortgage held by Trustco Bank which covered the property.

Trustco Bank commenced foreclosure proceedings in Supreme Court, Rensselear County, and the judge appointed a receiver, who by the terms of the judge's order was "totally responsible to protect and preserve the Mortgaged Premises." By the time the receiver qualified, the entire property became vacant of all tenants and it was abandoned by the Eakins. Although the Eakins, at the receiver's request, did drain the water pipes in anticipation of winter, they refused the receiver's specific demand for additional funds to further secure the property. The receiver derived no money from the buildings, since during the entire receivership, the total amount of rent turned over to the receiver was only $84.

The receiver wrote a letter to the foreclosing bank stating that although the property had been secured as well as possible, and the gas, water and electricity turned off and the water pipes drained, since there were no tenants or occupants in the apartments, the doors and windows should be bordered up to avoid vandalism. He also stated that he, as receiver, unfortunately had no funds to do so.

The bank refused to provide any funds to assist the receiver in preserving the property. The buildings remained unsupervised, unlet and unsecured until the foreclosure sale took place, at which time the bank acquired the property with its high bid of $75,000. The property was ultimately sold by the bank to a third party for $27,500.

The bank then made an application to the Supreme Court for a deficiency judgment against the Eakins, since the bank was still owed money on the mortgage. The deficiency judgement would be calculated as the difference between the amount of the mortgage and the market value of the property or the highest bid at the foreclosure sale, which ever was higher.

The bank produced an appraiser as a witness who testified that the market value of the property was $75,000 due to its deteriorated, vandalized state. The Eakins produced two appraisers, one of whom testified that the value of the property was $174,000, and the other that the market value was $140,000. Both appraisers testified that the damage to the property was merely cosmetic.

The Eakins also argued that no deficiency judgment should be awarded at all because the bank refused to advance funds to the receiver to preserve the property, or, in the alternative, that the receiver had the responsibility to take care of the property and should therefore be surcharged for the damage caused to the buildings while the receiver was in office.

The Appellate Division, Third Department analyzed the issue of court-appointed receivers in foreclosure actions. It stated that a receiver is an officer of the court and not an agent for the party who procured the receiver's appointment. During the pendency of the receivership the property is, in essence, in the possession of the court itself. The Court stated that while it may have been more prudent for the receiver to have applied to the Supreme Court to terminate the receivership when he discovered that the buildings were vacant and without rental income, the receiver nevertheless should not be put in jeopardy personally simply because the property was one which cannot readily be administered.

Further, the Court noted that since the bank was not a mortgagee in possession (for only then would the bank have been obliged to preserve the property from loss and injury and to conserve its value), the bank should not be denied a deficiency judgement. In hindsight, it may have been more prudent for the bank, instead of doing nothing, to have petitioned the Supreme Court for authority to expend its own funds to aid the receiver to secure the property, and to add those expenditures to the amount of the judgment. However, unless a mortgagee is in possession of the premises, it has no legal duty to expend funds to preserve the mortgaged property.

Indeed, in the absence of action by all the parties - the foreclosing mortgagee bank, the Eakins who owned the property, and the receiver - it was the Eakins who had the most to loose and therefore the greatest incentive to act because the amount of any potential deficiency judgment would be increased by a reduction of the market value of the property.

The Eakins justified their own inactivity by pointing to the language in the court order appointing the receiver that the Eakins were not to "interfere in any manner with the subject property." However, more important is the fact that the receiver specifically requested the assistance of the Eakins in securing the property, which they refused. It is axiomatic, the Court said, that Eakins' title and right to possession of the property continued until the foreclosure sale was concluded. Since the damage to the property occurred after the receiver was appointed and prior to the foreclosure sale, the Eakins must suffer the consequences caused by their failure to secure the property which they owned.

The Appellate Division then reviewed the evidence in the record of trial and concluded that the appraisal of $140,000 offered by a witness for the Eakins was credible and appropriate, and accordingly awarded Trustco Bank a deficiency judgment in the amount of the mortgage due, less the market value of the property, $140,000.

(Edward L. Schiff is a real estate partner in the Manhattan law firm of Hartman & Craven, LLP.)