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A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com Volume 256—NO. 47 Wednesday, September 7, 2016 COOPERATIVES AND Expert Analysis Priority of —Evolving Rules For Condominiums and Lenders

ooperative housing corpo- interest at elevated interest rations have a first on rates. This permits lenders to reap a the shares and appurtenant financial windfall when the is proprietary leases for co-op finally sold at auction, when lenders can apartments. As a result, in recover not only the unpaid principal Cthe event of a (whether on the , but also all unpaid interest By And initiated by the co-op to collect main- Eva Richard up to the date of the unit’s auction. As Talel Siegler tenance arrears or the holder of a share a result, and because unit mortgages /mortgage on an apartment), the are frequently for up to 80 percent of co-op will receive from the proceeds and a unit owner’s lender attempting the unit’s value, it is unlikely that there generated by the sale of the apartment to maximize the amount of and recover will be proceeds remaining with which the amount owed to it for unpaid main- its first mortgage of record—all in light to pay the HOA’s lien for unpaid com- tenance charges before payment of any of significant recent case . mon charges. portion of the outstanding balance of While an HOA can foreclose on its Lender Delays the loan owed to the apartment owner’s junior lien while this process is unfold- lender. When a unit owner is in default with ing, the HOA (or purchaser) would then However, a association respect to paying common charges and take of the unit subject to (HOA), unlike a co-op, does not have a mortgage indebtedness, the foreclosure the first mortgage—a potentially risky first lien for unpaid common charges on and expensive proposition given the condominium units. Therefore, when amount of post-default interest which a unit owner defaults on the payment A condominium association (HOA), has likely accrued on the loan. Ulti- of common charges and the mortgage unlike a co-op, does not have a first mately, the HOA will be lucky to see on the unit, the HOA’s lien for common lien for unpaid common charges any recovery for the common charges charges is junior to the “first mortgage on condominium units. it’s owed. of record against the premises.”1 This recognized posture by lenders—­ This column examines the conflicts proceeds are frequently insufficient to to extend the time between filing a that often arise in a foreclosure pro- cover the amount due to the HOA. While foreclosure action and requesting ceeding, as between an HOA seeking the lender is generally the first to com- judicial intervention to conclude the to recoup unpaid common charges, mence a foreclosure proceeding, it has foreclosure proceeding and auction no incentive to pursue the matter expe- the unit—is known as “shadow dock- ditiously or diligently. Because a lender eting.”2 Due to the potential for a lender Eva Talel is a partner at Stroock & Stroock & Lavan and an adjunct professor at New York Law School. gets paid in full on its first mortgage lien to accumulate substantial interest at Richard Siegler is of counsel to the firm. Michael before the HOA gets paid at all, lend- a default rate while the case remains Helweil, an associate at Stroock, and Margaret ers may take their time—sometimes­ dormant, “shadow docketing” has come Jones, research librarian at the firm, assisted in the preparation of this column. Stroock is counsel to the delaying sale of the unit in default for under fire by courts in recent years. Real Board of New York. years—to allow their loans to accrue New York courts have tolled interest Wednesday, September 7, 2016

in foreclosure actions where lenders in prosecuting its foreclosure proceed- 2012; no judge was even assigned to the have failed to negotiate in good faith ing. Importantly, and unlike in the cases case for three years. When the plaintiff with borrowers at settlement confer- discussed above which were decided in finally sought a judgment of foreclosure ences or when it would be unconscio- 2014 (where interest was either tolled in 2016, the HOA argued that the lend- nable to hold borrowers responsible or discussed approvingly), the court er’s seven-year delay in prosecuting the for a lender’s lengthy delay in obtaining did not explicitly find that the lender action should foreclose it from recov- the foreclosure judgment and selling failed to negotiate in good faith. The ering interest, particularly because the property. court thereby opened the door to the the lender’s delay, and the sizeable For example, in U.S. National perhaps evolving principle that lengthy amount of interest that had therefore Association v. Smith,3 the Appellate Divi- delays—regardless of a lender’s under- accumulated on the outstanding loan, sion, Second Department, held that a lying intent—may justify a court in toll- would preclude the HOA from recov- lender’s failure to negotiate in good ing the lender’s accrual of interest. ering any of the unit owner’s unpaid faith during settlement conferences In Gueye, Citimortgage held a mort- common charges. (the lender having failed to follow cer- gage loan on a condominium apartment. The court discussed whether the tain federal waiver guidelines and to When the owner defaulted on making delay was caused by inadvertent or produce documents as directed by a her loan payments, Citimortgage com- unintentional failures by the bank’s judicial referee), warranted the impo- menced a foreclosure action in 2009, counsel or was a purposeful and strate- sition of sanctions tolling the interest gic delay, designed to inflate the amount accruing on the loan for at least the of interest that would be owed to the period the lender failed to negotiate Lien priorities in the context of bank at the time of the foreclosure sale. in good faith. condominium have However, the court declined to base its Similarly, in Bank of America v. made it exceedingly difficult determination solely on these grounds. 4 Brooks, the court found “that an inordi- for HOAs to recover the com- The bank proffered no reason for its nate delay by a foreclosing lender could delay. Instead, it argued that the HOA result in the loss of interest or penal- mon charges a unit owner owes. could have recovered common charges ties due under the terms of the loan.” However, the holding in ‘Gueye’ had it promptly started its own foreclo- However, the court denied the HOA’s provides HOAs with some hope sure proceeding. But, as the court not- request to compel the lender to pay the of change, by perhaps standing ed, this would have been an expensive common charges owed, even though choice for the HOA because even if the the lender waited four years after fil- for the proposition that lenders HOA had done so, it would not trans- ing the foreclosure case to schedule a cannot indefinitely fail to pursue form the HOA into a senior lien holder. settlement conference. The court held a foreclosure proceeding. The bank would still receive all monies that there was no basis upon which a due it before the HOA could recover junior lien holder can recover damages but did not seek a foreclosure judgment anything. To make matters worse, if the from a senior lien holder who was not until seven years later. The HOA (which HOA commenced an action, it would expeditiously enforcing its rights. held a common charge lien against the incur legal fees, the recovery of which unit) sought an order directing that would also come behind the bank’s first Significant Recent Cases the amount of the interest which had mortgage lien. A court’s ability and willingness to accrued, and which the bank sought While the court found that there toll a lender’s interest accrual is a valu- to recover, be reduced or extinguished was no set time period within which a able tool for HOAs seeking to recover because the bank delayed in its pros- lender was legally obligated to pursue common charges owed by a unit owner. ecution of the case. a foreclosure proceeding, seven years In June 2016, in Citimortgage v. Although the borrower/unit owner between commencement of the pro- Gueye,5 that tool gained further utility had defaulted after she was served ceeding and the bank’s motion for a when a New York County court granted with the lender’s complaint in 2009 judgment of foreclosure was too long. an HOA’s motion to reduce accrued and did nothing thereafter to appear The court determined that approxi- interest allegedly owed to a lender in the action, the lender did not file a mately $100,000 of accrued interest because of the lender’s lengthy delay “request for judicial intervention” until was attributable almost entirely to Wednesday, September 7, 2016

the bank’s failure to prosecute its case v. Citibank.9 There, the purchaser of a proposition that lenders cannot indefi- in a timely fashion and the bank was unit at a foreclosure sale in a proceed- nitely fail to pursue a foreclosure pro- therefore precluded from collecting ing commenced by the HOA for unpaid ceeding—even in the absence of bad such accrued interest. common charges, purchased subject faith, a court may toll or reduce interest While the Gueye court described the to the first mortgage of record. Subse- owed to a lender, thereby potentially bank’s actions as far from ideal, it did quently, the purchaser commenced a leaving proceeds available for an HOA not go as far as to find or hold that the seeking a declaration that two to recover on its common charge lien. bank acted in bad faith (or failed to mortgages which had been consolidat- Boards should therefore vigilantly mon- negotiate or act in good faith). Although ed and recorded as such seven years itor the progress of a lender-initiated it appears that the bank’s intent was before the HOA filed its common charg- foreclosure proceeding and make their not wholly irrelevant to the court’s es lien against the unit must be broken presence and vigilance known to the decision, the opinion suggests that a down into their component mortgages lender and the court. lender’s failure to diligently pursue a in order to identify the first mortgage Lastly, with regard to the amount of foreclosure case may, in and of itself, of record, and that only the “original” a “first mortgage lien,” boards can now be a sufficient basis for reducing and/or first mortgage qualified as such, while confidently proceed in the knowledge tolling accrued interest. the with which it had that if the HOA’s common charge lien been consolidated was extinguished preceded the consolidation of a later First Mortgage Lien by the HOA’s common charge lien and recorded mortgage, the later recorded Real §339-z (RPL) pro- subsequent sale of the unit upon the mortgage will not defeat the HOA’s lien, vides that a condominium’s “board of foreclosure of the HOA’s lien. notwithstanding its consolidation with managers… shall have a lien on each The Court of Appeals held that a mortgage that preceded the recorda- unit for the unpaid common charges for purposes of determining priority tion of the HOA’s lien. thereof, together with interest thereon, under the RPL when there is an inter- ••••••••••••••••••••••••••••• prior to all other liens except only…(ii) vening lien, the mortgages retain their 1. Plotch v. Citibank, 27 N.Y.3d 477 (2016). In all sums unpaid on a first mortgage of separate-lien status. Thus, if a lender Plotch, the Court of Appeals also determined record.”6 New York courts have histori- recorded the consolidation agreement that only certain consolidated and recorded loans on condominium units would be treated cally been inconsistent in their deter- after an HOA’s common charge lien was as “first mortgages,” as we discuss later in this mination of what constitutes the “first recorded, only the original mortgage column. mortgage of record” when dealing with would be considered the “first mort- 2. Pete Brush, “NY Shadow Docket’ Law a consolidated mortgage. gage of record.” Shifts Onus to Foreclosure ,” Law360, Aug. 1, 2013 available at http://www.law360. For example, in 1993, a court ruled However, in Plotch there was no inter- com/articles/461946/ny-shadow-docket-law- that where a lender consolidates vening HOA common charge lien at the shifts-onus-to-foreclosure-lawyers. two or more mortgages into a single time the mortgages were consolidated 3. 123 AD3d 914, 916-17 (2d Dept. 2014). 4. 43 Misc.3d 1234(A), (Sup. Ct. Westchester ­mortgage—even if the consolidat- and, therefore, the court held that the County 2014). ed mortgage was recorded prior to entire amount of the consolidated mort- 5. 52 Misc.3d 1203(A) (Sup. Ct. N.Y. County an HOA’s lien for unpaid common gages constituted the first mortgage of 2016). 6. NY REAL PROP §339-z. charges—­only the original first mort- record, and the unit had therefore been 7. Societe Generale v. Charles & Co. Acqui- gage has priority over the HOA’s lien.7 purchased subject to the entire amount sition, 157 Misc.2d 643 (Sup. Ct. N.Y. County On the other hand, from 1994 through of the consolidated recorded mortgage. 1993). 8. See e.g. Dime Sav. Bank of N.Y. v. Levy, 2013, several courts8 reached the oppo- Recommendations 161 Misc 2d 480 (Sup. Ct. Rockland Co. 1994); site conclusion, holding that a consoli- Greenpoint Bank v. El-Basary, 184 Misc 2d 888 dation agreement recorded prior to the Lien priorities in the context of con- (Sup. Ct. N.Y. County 2000); AMT CADC Ven- ture, LLC v. 455 CPW, LLC, 45 Misc 3d 176 (Sup. board’s common charge lien qualifies all dominium foreclosures have made Ct. N.Y. County 2013). of the mortgages which it consolidates it exceedingly difficult for HOAs to 9. Plotch v. Citibank, 27 N.Y.3d 477. to be treated as the first mortgage of recover the common charges a unit record, for purposes of the RPL. owner owes. However, the holding in Reprinted with permission from the September 7, 2016 edition of the NEW YORK In May of 2016, the New York Court of Gueye provides HOAs with some hope LAW JOURNAL © 2016 ALM Media , LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 Appeals addressed this issue in Plotch of change, by perhaps standing for the or [email protected]. # 070-09-16-16