Cooperatives & Condominiums

Junior Mortgagee Not Named

Board of Managers of the Parkchester North Condominium v. Alaska Seaboard Partners

NYLJ 2/26/07, p. 28, col. 6

AppDiv, First Dept

(memorandum opinion)

In an action by a condominium board to foreclose on a lien for common charges, holder of a mortgage lien on the condominium unit appealed from Supreme Court's grant of summary judgment discharging the mortgage lien. The Appellate Division reversed, holding that the mortgagee was a necessary party to the foreclosure action, and failure to join the mortgagee in that action left the mortgagee's rights unaffected by the foreclosure.

Mortgagee recorded its mortgage before the condominium board filed its notice of pendency and brought its action to foreclose on its lien for common charges. The condominium board did not, however, join mortgagee as a party in that action. When the condominium board obtained judgment in the foreclosure action, it sought discharge of the mortgage lien and a declaration that the condominium owned the unit free and clear of all subordinate liens. Supreme Court awarded summary judgment to the condominium board, and mortgagee appealed.

In reversing, the Appellate Division relied upon RPAPL 1311, which provides that in a foreclosure action, '[e]ach of the following persons, whose interest is claimed to be subject to and subordinate to the plaintiff's lien, shall be made a party defendant to the action ' 3. [e]very person having any lien or incumbrance upon the real property which is claimed to be the subject and subordinate to the lien of the plaintiff.' The court held that the statute made mortgagee a necessary party. The court then concluded that failure to join the mortgagee left the mortgagee's rights unaffected by the foreclosure sale, and rendered the sale void as to the excluded party. Hence, the condominium was not entitled to extinguish the mortgage lien.

COMMENT

When a mortgagee fails to join the holder of a subordinate interest in a foreclosure action, the foreclosure sale will not extinguish the subordinate interest. Thus, in Gage v. Brewster, 31 N.Y. 218, the Court of Appeals held that a foreclosure sale was void against a subordinate mortgagee who had a recorded interest but was not made a party. The subordinate mortgagee was allowed to exercise the equity of redemption by paying off the senior mortgage debt with interest as if the foreclosure sale had never taken place.

When a subordinate interest survives a foreclosure sale, the winning bidder may generally rescind the bid Thus, in Verdin v. Slocum, 71 N.Y. 345, the Court of Appeals allowed the winning bidder to withdraw from making the purchase because a subordinate interest survived the foreclosure sale. The bidder does not have a right to rescind, however, when the bidder had knowledge of the encumbrance prior to the foreclosure sale. In Mandelino v. Levy, 49 Misc. 2d 134, the court did not allow the winning bidder to rescind the bid even though the mortgagee had failed to join a judgment creditor because the bidder had knowledge of the encumbrance at the time he made the bid.

A purchaser at a foreclosure sale who takes property subject to a subordinate interest may extinguish that interest by reforeclosing the mortgage or bringing a strict foreclosure action. A strict foreclosure is a process of extinguishing the surviving interest by giving time to the holder of the subordinate interest to either redeem the mortgage or, if the subordinate interest is a mortgage, to bring a foreclosure action for the subordinate interest. RPAPL ' 1352. (If the subordinate interest is a lease, the strict foreclosure action gives tenant an opportunity to redeem. See Ridge Realty LLC v. Goldman, 263 AD2d 22). In 2035 Realty Co. v. Howard Fuel Corp., 77 A.D.2d 870, the court held that a purchaser has an 'absolute right' to bring a strict foreclosure. The holder of a subordinate lien argued that the owner had knowledge of the lien at the time he took the property by assignment from a bank. The court stated that knowledge was 'irrelevant' to a right to strictly foreclose a property purchased through a foreclosure sale.

Junior Mortgagee Not Named

Board of Managers of the Parkchester North Condominium v. Alaska Seaboard Partners

NYLJ 2/26/07, p. 28, col. 6

AppDiv, First Dept

(memorandum opinion)

In an action by a condominium board to foreclose on a lien for common charges, holder of a mortgage lien on the condominium unit appealed from Supreme Court's grant of summary judgment discharging the mortgage lien. The Appellate Division reversed, holding that the mortgagee was a necessary party to the foreclosure action, and failure to join the mortgagee in that action left the mortgagee's rights unaffected by the foreclosure.

Mortgagee recorded its mortgage before the condominium board filed its notice of pendency and brought its action to foreclose on its lien for common charges. The condominium board did not, however, join mortgagee as a party in that action. When the condominium board obtained judgment in the foreclosure action, it sought discharge of the mortgage lien and a declaration that the condominium owned the unit free and clear of all subordinate liens. Supreme Court awarded summary judgment to the condominium board, and mortgagee appealed.

In reversing, the Appellate Division relied upon RPAPL 1311, which provides that in a foreclosure action, '[e]ach of the following persons, whose interest is claimed to be subject to and subordinate to the plaintiff's lien, shall be made a party defendant to the action ' 3. [e]very person having any lien or incumbrance upon the real property which is claimed to be the subject and subordinate to the lien of the plaintiff.' The court held that the statute made mortgagee a necessary party. The court then concluded that failure to join the mortgagee left the mortgagee's rights unaffected by the foreclosure sale, and rendered the sale void as to the excluded party. Hence, the condominium was not entitled to extinguish the mortgage lien.

COMMENT

When a mortgagee fails to join the holder of a subordinate interest in a foreclosure action, the foreclosure sale will not extinguish the subordinate interest. Thus, in Gage v. Brewster , 31 N.Y. 218, the Court of Appeals held that a foreclosure sale was void against a subordinate mortgagee who had a recorded interest but was not made a party. The subordinate mortgagee was allowed to exercise the equity of redemption by paying off the senior mortgage debt with interest as if the foreclosure sale had never taken place.

When a subordinate interest survives a foreclosure sale, the winning bidder may generally rescind the bid Thus, in Verdin v. Slocum, 71 N.Y. 345, the Court of Appeals allowed the winning bidder to withdraw from making the purchase because a subordinate interest survived the foreclosure sale. The bidder does not have a right to rescind, however, when the bidder had knowledge of the encumbrance prior to the foreclosure sale. In Mandelino v. Levy, 49 Misc. 2d 134, the court did not allow the winning bidder to rescind the bid even though the mortgagee had failed to join a judgment creditor because the bidder had knowledge of the encumbrance at the time he made the bid.

A purchaser at a foreclosure sale who takes property subject to a subordinate interest may extinguish that interest by reforeclosing the mortgage or bringing a strict foreclosure action. A strict foreclosure is a process of extinguishing the surviving interest by giving time to the holder of the subordinate interest to either redeem the mortgage or, if the subordinate interest is a mortgage, to bring a foreclosure action for the subordinate interest. RPAPL ' 1352. (If the subordinate interest is a lease, the strict foreclosure action gives tenant an opportunity to redeem. See Ridge Realty LLC v. Goldman, 263 AD2d 22). In 2035 Realty Co. v. Howard Fuel Corp. , 77 A.D.2d 870, the court held that a purchaser has an 'absolute right' to bring a strict foreclosure. The holder of a subordinate lien argued that the owner had knowledge of the lien at the time he took the property by assignment from a bank. The court stated that knowledge was 'irrelevant' to a right to strictly foreclose a property purchased through a foreclosure sale.