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Complications in foreclosing a condo unit.

Complications in foreclosing a condo unit

The troubled real estate market in New York has brought to the surface important legal issues requiring interpretations for the first time of long standing statutes. The laws regarding foreclosure of condominium units by banks have been on the books for over 30 years (when the Condominium Act was adopted in New York State), yet they give rise to conflicting judicial decisions because the laws are being interpreted for the first time.

A foreclosure proceeding involves the foreclosing out or the cutting off of all subordinate liens on the property. The priority of liens, therefore becomes a vital issue in determining which lien is cut off, and which survives.

The Condominium Act in New York provides that the board of managers of a condominium shall have a lien for unpaid common charges prior to all other liens except only real estate taxes on and the first mortgage on the unit. The law also provides that upon the sale of a condominium unit, all unpaid common charges shall be paid out of the sale proceeds by the grantee (the new owner of the property).

Two cases recently reported in the New York Law Journal demonstrate conflicting judicial rulings as to what the Condominium Act means as it relates to foreclosure of condominium residential units. One case was decided by Justice David Saxe, Supreme Court New York County (Prudential Insurance Company of America vs. Ward, New York Law Journal May 15, 1991, page 22 column 2), and the other by Justice Ira Gammerman also of the Supreme Court New York County (Bankers Trust Co. vs. Pal. New York Law Journal June 26, 1991, page 23, column 1).

The Prudential case was rather simple. Prudential Insurance Company made a mortgage loan to the purchaser of a condominium apartment at the Parc Vendome, 350 West 57th Street, New York City. When the condominium unit owner defaulted under the mortgage, Prudential obtained a judgment of foreclosure of the unit. The board of managers of the Parc Vendome then sought to amend the judgment of foreclosure to provide that all of the unpaid common charges on the unit be paid either out of surplus proceeds after the foreclosure sale of the unit or by the purchaser of the unit at the sale.

Prudential opposed the board's effort and argued that Prudential itself might ultimately bid in and purchase the condominium unit if no other bid would be high enough to pay off the first mortgage. In such event, Prudential argued, it should not be required to pay the common charges to the condominium since Prudential's first mortgage was a superior lien to the lien for unpaid common charges according to law.

Justice Saxe acknowledged that the condominium statute on the one hand affords the first mortgagee of a condominium residential unit a lien superior to the lien for unpaid common charges, yet on the other hand requires that any grantee of the unit pay to the condominium those very common charges. The judge stated that the statute does not carve out any different treatment for a purchasing mortgagee upon a foreclosure sale than any other grantee. As a practical matter, the court stated, if Prudential purchases the condominium unit at the foreclosure sale the superiority of the first mortgage lien becomes undermined by the statutory requirement that Prudential, as a purchaser of the unit pay the unpaid common charges to the condominium. In effect, in those circumstances, it is as if the condominium possessed a lien superior to that of Prudential's first mortgage.

The court rejected Prudential's interpretation that when a first mortgagee takes title to a unit on a foreclosure sale, it is not a "grantee" for the purpose of the Condominium Statute. The court held that there is nothing in the wording of the statute that allows for such interpretation. While the statute creates a "hybrid" form of priority, it is the only interpretation which can give effect to the word "grantee" in that law.

The court therefore ruled that the judgment of foreclosure should include a provision that the condominium's lien for unpaid common charges on the unit shall be paid either out of surplus proceeds on the foreclosure sale, or if those proceeds are insufficient, then by the purchaser of the unit even if the purchaser is the Prudential Insurance Company itself.

Justice Gammerman reached the opposite conclusion in the more complicated Bankers Trust case.

Bankers Trust Company held a mortgage on two residential condominium units owned by Mr. and Mrs. Pal located at 900 Park Avenue, New York City, New York. One of the two condominium units was rented to Mr. Wender with the approval of the board of managers of the condominium.

Mr. and Mrs. Pal defaulted under the Bankers Trust mortgage and they were notified in December, 1988 that unless they cured their defaults by the following month, they would face foreclosure. The Pals did not cure the defaults and foreclosure proceedings were commenced against them almost a year later, in December 1989 by Bankers Trust. Also named in the foreclosure action was Wender, as the lessee of the unit.

The court dealt with the issue of the board of managers' claim to a prior lien for common charges superior to that of Bankers Trust's lien of the first mortgage. The Pals were in arrears in common charges for a year and a half before the foreclosure action was started.

The board maintained that the condominium statute entitles it to recover the common charges due it from the proceeds of the foreclosure sale and that if there was any deficiency from the sale, then the grantee of the unit would have to pay those past due common charges.

Bankers Trust argued that the condominium statute permits it as a first mortgagee to foreclose out the subordinate lien for common charges which liens may be satisfied only out of any surplus monies generated by the foreclosure sale. In essence, Bankers Trust argued that the board's liens did not survive the foreclosure sale and are extinguished if there are no excess proceeds from the sale to pay the past due common charges due.

Justice Gammerman confronting the same issue as did Justice Saxe which was whether a sale or conveyance of the unit as set out in the Condominium Act includes a foreclosure sale. Justice Gammerman concluded that taking into account the purpose of a foreclosure sale (i.e., the joinder of all subordinate interests to extinguish those subordinate interests and to vest complete title in the purchaser at a judicial sale) concluded that the provisions of the condominium statute applies only to a general sale or conveyance of a condominium unit to a grantee and not to a first mortgagee who acquires title at a foreclosure sale. The court pointed out that the condominium statute carves out a specific exception to this rule when it comes to a non-residential condominium. In the case of a non-residential condominium, the declaration of the condominium may provide that the lien for common charges can be superior to any mortgage lien of record. Thus a specific mechanism for establishing the priority of common charges over a mortgage lien is limited to a non-residential condominium. The court concluded that the lien for common charges of a residential condominium had no priority over a first mortgage.

Wender claimed that his lease should not be foreclosed since Bankers Trust failed to take prompt action in instituting the foreclosure proceedings but waited a year after the default before action was taken. Further, Wender asserted that action on the part of the board of managers in approving the lease knowing that the Pals were in default in the payment of common charges for a year and a half are grounds to deny Bankers Trust its right to foreclose Wender's lease.

The court denied the relief requested by Wender. The court held that Wender should have known the condominium apartment unit which he rented was encumbered by a mortgage since the mortgage was of record. He could have inquired as to the status of that mortgage before he entered into his lease with the Pals. Wender never did make any inquiry of Bankers Trust regarding the mortgage and Bankers Trust never made any representations to Wender or concealed any facts from him with respect to the mortgage.

With respect to Wender's further claim that Banker's Trust was guilty of laches because it did not proceed promptly to foreclose its mortgage after default, the court ruled that the law permits a law suit to be commenced within six years after a note or mortgage is in default and therefore Wender's defense of laches could not stand.

While the Bankers Trust case is somewhat more complicated than the Prudential case, the main thrust of both cases is the interpretation of the provisions of the Condominium Act dealing with the foreclosure of a residential unit.

The diametrically opposed conclusions reached by two justices of the Supreme Court of New York County will await - resolution by an appellate court. In the interim however, in a declining real estate market where values of condominium units frequently fall below the outstanding balances of mortgages in default, it is clear that these foreclosure provisions of the Condominium Act will prove to be extremely vexing for mortgagees.

Edward L. Schiff is a real estate lawyer with the firm of Edwards & Angell in New York City.
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Article Details
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Title Annotation:Getting Down to Cases
Author:Schiff, Edward L.
Publication:Real Estate Weekly
Article Type:column
Date:Sep 25, 1991
Previous Article:Homebuyer tour sponsored by Carnegie Hill Properties.
Next Article:Troubled shopping center: tenant beware.

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