CPLR ' 6501 in Mortgage Foreclosure Actions and RPL ' 290 Short-term Leases

There is an open question of whether a lease or other occupancy/possessory agreement of less than three (3) years' duration (the “Short-term Lease”), entered into after the commencement of a plenary mortgage foreclosure action against the demised premises and the filing of a N/P of such action, may be cut off by the subsequent foreclosure sale if the party holding the interest under the Short-term Lease is not made a party defendant to the foreclosure action. Compare cases cited in fn. 12 of “Foreclosure Crisis: Both Owners, Many Tenants to Be Homeless,” NYLJ, 01/16/09, p. 4, by Raun J. Rasmussen (the “Rasmussen Article”), e.g., Greenpoint Savings Bank v. DeFour, 162 Misc. 2d 476 (Sup. K. Co. 1994), with cases cited in fn. 13 of the Rasmussen Article, e.g., Nomura Home Equity Loan, Inc. v. Vacchio, 21 Misc. 3d 333 (Sup., Nass. Co. 2008).

The question arises because a Short-term Lease by statutory definition is not a “conveyance” of an interest in or encumbrance upon real estate. RPL ' 290. Therefore, strict statutory construction of CPLR ' 6501 and RPL '290 means that the post-N/P Short-term Lease is not subject to the previously filed N/P. Consequently, absent post-commencement joinder(s) of the Short-term Lease interest holders whenever their respective post-N/P short-term interests begin, such interest(s) obtained by the Short-term Lease(s) will not be cut-off by the foreclosure sale. See IAS and lower court cases, Rasmussen Article, fn. 12.

CPLR ' 6501

CPLR ' 6501 is strictly construed whenever courts have to determine whether a N/P was properly filed, i.e., a determination of whether the filer's litigation seeks a judgment actually affecting the use, title, occupancy or enjoyment of the subject realty. 5303 Realty Corp. v. O&Y Equity Corp., 64 N.Y.2d 313, 318 (1984); Matter of Sakow, 97 N.Y.2d 436, 436 (2002). But see Nadeau v. Tuley, 160 A.D.2d 1130, 1132 (3rd Dep't), app. dsm. 76 N.Y.2d 846, recon. den. 76 N.Y.2d 890 (1990), holding that a 30-day month-to-month tenant may not file a N/P in a plenary action seeking recovery of the demised premises, although such plenary action seeks possession of realty. In other words, despite the fact that Nadeau was a plenary action and not a S/P-R, the exceedingly short term of plaintiff's claimed possessory interest barred a N/P due to the serious imposition upon the subject realty caused by the ex parte filing of the N/P. The court ruled: ” ' we conclude that a potential judgment granting possession of realty under a month-to-month tenancy is not within the intended scope of CPLR 6501.”

The purpose underlying CPLR ' 6501, which binds post-N/P recorded encumbrances on and conveyances of interest in the subject realty, should permit a filer of a N/P to cut off any post-N/P created interest in the subject realty. But, by reason of RPL ' 290, it does not cut off post-N/P short-term lease interests. Therefore, the possessory or other interest created by the post-N/P Short-term Lease may not be cut-off without some judicial proceeding in addition to the foreclosure action.

The Difficulties

Bergman succinctly exposes the difficulties with this position. 3, Bergman on New York Mortgage Foreclosures, Sec. 33.04(4). A mortgage foreclosure action seeks sale of the subject realty with the same state of title as existed when the mortgage was given. 79 N.Y. Jur.2d, Mortgages & Deeds of Trust, ' 768, p. 102, and ' 769, p. 103. The foreclosing party does so by joining all parties whose acquired interests are subordinate to the lien of the mortgage being foreclosed. The beneficial effect of filing a N/P of a foreclosure action, to bind all non-defendant parties who later obtain tenancy (or other) interests in or encumbrances on the subject realty, precludes the necessity of consistently having to join those entities and their later acquired interests in the realty and thereby effectively compel the N/P filer repeatedly to re-start the foreclosure action. Rausmussen Article, fn. 13; see also Astoria Fed'l S&L Assoc. v. Probkevitz, ___ Misc. 2d ___; NYLJ, 02/02/95, p. 36, col. 3 (Sup., Q. Co.) holding that a Short-term Lease interest in the realty obtained post-N/P is cut off by the mortgage foreclosure sale (per the court, because the determinative issue was when the tenancy arose and not whether pursuant to a Short-term Lease, concluding that a literal construction of the precise terms of CPLR ' 6501 “render[s] the notice of pendency meaningless”). For authority, Astoria Federal, supra, relied upon Flushing Svgs. Bk. v. CCN Realty Corp., 82 A.D.2d 907, 908 (2d Dep't 1981). There, the Appellate Division cited its earlier 1980 holding that the occupants of the mortgagor's adult proprietary home were subordinate lessees who had to be joined as defendants in the foreclosure action. 73 A.D.2d 945, 946 (2d Dep't 1980). Therefore, in 1981, the Appellate Division concluded that all occupants of the home:

have the same rights '[a]s tenants whose leaseholds are subordinate to the mortgage of plaintiff' [cit. om.]. As such, a person who becomes an occupant thereof after the proper filing of [a N/P] in an action to foreclose a mortgage on the premises is bound to the results of the mortgage foreclosure action “to the same extent as if he were a party.” 82 A.D.2d, at 908.

The 1980 decision in CCN Realty Corp. required the joinder of the occupants, but neither the 1980 nor the 1981 Appellate Division decisions stated whether the respective tenancy interests were or were not obtained pursuant to Short-term Leases. Arguably, then, the CCN Realty Corp. case might have been inapposite to the actual facts and not support the holding in Astoria Federal. Indeed, one IAS court, which concluded that Short-term Leases entered into post-N/P filing are not cut-off by the foreclosure action, so held. Bowery Svgs. Bk. v. Giannattasio, (Article, fn. 12); ___ Misc. 2d ___; NYLJ, 05/10/95, p. 34 col. 3 (Sup. Suff. Co.).

The Recourse

In light of this conundrum, the only recourse for the mortgagee or successful purchaser at the foreclosure sale is recourse to post-foreclosure additional litigation, to wit: either a plenary action of strict foreclosure re-foreclosure ' or, if appropriate, some type of summary dispossess proceeding in the local venue's Landlord-Tenant Court. Each are brought subsequent to completion of the mortgage foreclosure action. Avenues of additional litigation have been detailed in “Strict Foreclosure Revisited,” NYLJ, 02/16/00, p. 1 col. 1, by John G. Hall; and, again in “Post-Foreclosure Eviction of Post-Notice of Pendency Tenants.” NYLJ, 04/12/00, p. 5 col. 2, by Judge Kenneth L. Gartner. A pervasive but not mentioned issue in both Mr. Hall's and Judge Gartner's articles is the compelled need and additional judicial burden to pursue multiple litigations just to convey title as it existed on the date the foreclosed mortgage was given. Given the present state of the law regarding the post-N/P Short-term Lease interest(s), passing title clear of those interests is achievable only by some post-foreclosure additional litigation.

Consequently, there is presently an irreconcilable conflict among various courts. The discrepancy is caused by the inherent inconsistency between: 1) the exact language of CPLR ' 6501, especially when considered along with the definitional provision in RPL '290; and 2) the goal of a foreclosure action enhanced by the salutary effect of an early filed N/P in a mortgage foreclosure action. To end such conflict and to obviate the need to clog court calendars with post-foreclosure plenary actions for either strict foreclosure or re-foreclosure ' or, perhaps some type of S/P-R ' it is this author's opinion that the problem noted here further suggests consideration to amending CPLR ' 6501 and, concomitantly, RPL ' 290. Any such revision should address not only the problem of post-N/P Short-term Leases but all interests in the mortgaged realty acquired, in any fashion, post-N/P.

Conclusion

It is submitted that all post-N/P acquired interests should be bound to the results of the foreclosure action. That is particularly true as to post-N/P Short-term Leases since, as a matter of fact and law, the post-N/P short-term interest holders were on actual, or at least constructive, notice of the pending foreclosure action, e.g., Holly Realty Co. v. Wortmann, 121 N.Y. Supp. 572; 1910 N.Y. Misc. LEXIS 688 (Mun. Ct., Manh. 6th Dist., 1910); CPLR ' 6501.

Joel David Sharrow is counsel to Moses & Singer LLP, Manhattan, specializing in various types of real-estate oriented, creditor rights and general commercial litigation. 'Joel David Sharrow, 2009.

This author previously suggested consideration of amending CPLR ' 6501. See Sharrow, “A Possible Need to Amend CPLR ' 6501,” New York Real Estate Law Reporter, Vol. 19, No. 11, Oct. 2005, p. 1, questioning what happens to a properly filed Notice of Pendency (the “N/P”) when the plenary action in which the N/P was filed is converted into a landlord-tenant summary proceeding to recover real property (the “S/P-R”). The article herein addresses an additional reason for amending CPLR ' 6501, to wit: whether a properly filed N/P in a mortgage foreclosure plenary action binds to its results a later created interest in the subject realty evidenced by any type of lease or other possessory interest agreement for a term of less than three (3) years.

Presently, CPLR ' 6501 disallows filing of a N/P in any S/P-R, but does permit a N/P in any landlord-tenant or other plenary action seeking possession of realty. Both involve claims of use, possession or enjoyment of demised premises, but only the plenary action permits filing a N/P. The prohibition against filing a N/P in a S/P-R applies whether the claimed entitlement to recover/enjoy/possess the subject realty is based upon an oral or written agreement for any interest in the real estate and/or merely an implied agreement for just a one month time period; or, if not written, having the maximum duration allowable by the applicable Statute of Frauds. Gen'l Obl. L. ' 5-703.

An Open Question

There is an open question of whether a lease or other occupancy/possessory agreement of less than three (3) years' duration (the “Short-term Lease”), entered into after the commencement of a plenary mortgage foreclosure action against the demised premises and the filing of a N/P of such action, may be cut off by the subsequent foreclosure sale if the party holding the interest under the Short-term Lease is not made a party defendant to the foreclosure action. Compare cases cited in fn. 12 of “Foreclosure Crisis: Both Owners, Many Tenants to Be Homeless,” NYLJ , 01/16/09, p. 4, by Raun J. Rasmussen (the “Rasmussen Article”), e.g., Greenpoint Savings Bank v. DeFour , 162 Misc. 2d 476 (Sup. K. Co. 1994), with cases cited in fn. 13 of the Rasmussen Article, e.g., Nomura Home Equity Loan, Inc. v. Vacchio , 21 Misc. 3d 333 (Sup., Nass. Co. 2008).

The question arises because a Short-term Lease by statutory definition is not a “conveyance” of an interest in or encumbrance upon real estate. RPL ' 290. Therefore, strict statutory construction of CPLR ' 6501 and RPL '290 means that the post-N/P Short-term Lease is not subject to the previously filed N/P. Consequently, absent post-commencement joinder(s) of the Short-term Lease interest holders whenever their respective post-N/P short-term interests begin, such interest(s) obtained by the Short-term Lease(s) will not be cut-off by the foreclosure sale. See IAS and lower court cases, Rasmussen Article, fn. 12.

CPLR ' 6501

CPLR ' 6501 is strictly construed whenever courts have to determine whether a N/P was properly filed, i.e., a determination of whether the filer's litigation seeks a judgment actually affecting the use, title, occupancy or enjoyment of the subject realty. 5303 Realty Corp. v. O&Y Equity Corp., 64 N.Y.2d 313, 318 (1984); Matter of Sakow, 97 N.Y.2d 436, 436 (2002). But see Nadeau v. Tuley , 160 A.D.2d 1130, 1132 (3rd Dep't), app. dsm. 76 N.Y.2d 846, recon. den. 76 N.Y.2d 890 (1990), holding that a 30-day month-to-month tenant may not file a N/P in a plenary action seeking recovery of the demised premises, although such plenary action seeks possession of realty. In other words, despite the fact that Nadeau was a plenary action and not a S/P-R, the exceedingly short term of plaintiff's claimed possessory interest barred a N/P due to the serious imposition upon the subject realty caused by the ex parte filing of the N/P. The court ruled: ” ' we conclude that a potential judgment granting possession of realty under a month-to-month tenancy is not within the intended scope of CPLR 6501.”

The purpose underlying CPLR ' 6501, which binds post-N/P recorded encumbrances on and conveyances of interest in the subject realty, should permit a filer of a N/P to cut off any post-N/P created interest in the subject realty. But, by reason of RPL ' 290, it does not cut off post-N/P short-term lease interests. Therefore, the possessory or other interest created by the post-N/P Short-term Lease may not be cut-off without some judicial proceeding in addition to the foreclosure action.

The Difficulties

Bergman succinctly exposes the difficulties with this position. 3, Bergman on New York Mortgage Foreclosures, Sec. 33.04(4). A mortgage foreclosure action seeks sale of the subject realty with the same state of title as existed when the mortgage was given. 79 N.Y. Jur.2d, Mortgages & Deeds of Trust, ' 768, p. 102, and ' 769, p. 103. The foreclosing party does so by joining all parties whose acquired interests are subordinate to the lien of the mortgage being foreclosed. The beneficial effect of filing a N/P of a foreclosure action, to bind all non-defendant parties who later obtain tenancy (or other) interests in or encumbrances on the subject realty, precludes the necessity of consistently having to join those entities and their later acquired interests in the realty and thereby effectively compel the N/P filer repeatedly to re-start the foreclosure action. Rausmussen Article, fn. 13; see also Astoria Fed ' l S&L Assoc. v. Probkevitz, ___ Misc. 2d ___; NYLJ, 02/02/95, p. 36, col. 3 (Sup., Q. Co.) holding that a Short-term Lease interest in the realty obtained post-N/P is cut off by the mortgage foreclosure sale (per the court, because the determinative issue was when the tenancy arose and not whether pursuant to a Short-term Lease, concluding that a literal construction of the precise terms of CPLR ' 6501 “render[s] the notice of pendency meaningless”). For authority, Astoria Federal, supra , relied upon Flushing Svgs. Bk. v. CCN Realty Corp. , 82 A.D.2d 907, 908 (2d Dep't 1981). There, the Appellate Division cited its earlier 1980 holding that the occupants of the mortgagor's adult proprietary home were subordinate lessees who had to be joined as defendants in the foreclosure action. 73 A.D.2d 945, 946 (2d Dep't 1980). Therefore, in 1981, the Appellate Division concluded that all occupants of the home:

have the same rights '[a]s tenants whose leaseholds are subordinate to the mortgage of plaintiff' [cit. om.]. As such, a person who becomes an occupant thereof after the proper filing of [a N/P] in an action to foreclose a mortgage on the premises is bound to the results of the mortgage foreclosure action “to the same extent as if he were a party.” 82 A.D.2d, at 908.

The 1980 decision in CCN Realty Corp. required the joinder of the occupants, but neither the 1980 nor the 1981 Appellate Division decisions stated whether the respective tenancy interests were or were not obtained pursuant to Short-term Leases. Arguably, then, the CCN Realty Corp. case might have been inapposite to the actual facts and not support the holding in Astoria Federal. Indeed, one IAS court, which concluded that Short-term Leases entered into post-N/P filing are not cut-off by the foreclosure action, so held. Bowery Svgs. Bk. v. Giannattasio, (Article, fn. 12); ___ Misc. 2d ___; NYLJ, 05/10/95, p. 34 col. 3 (Sup. Suff. Co.).

The Recourse

In light of this conundrum, the only recourse for the mortgagee or successful purchaser at the foreclosure sale is recourse to post-foreclosure additional litigation, to wit: either a plenary action of strict foreclosure re-foreclosure ' or, if appropriate, some type of summary dispossess proceeding in the local venue's Landlord-Tenant Court. Each are brought subsequent to completion of the mortgage foreclosure action. Avenues of additional litigation have been detailed in “Strict Foreclosure Revisited,” NYLJ, 02/16/00, p. 1 col. 1, by John G. Hall; and, again in “Post-Foreclosure Eviction of Post-Notice of Pendency Tenants.” NYLJ, 04/12/00, p. 5 col. 2, by Judge Kenneth L. Gartner. A pervasive but not mentioned issue in both Mr. Hall's and Judge Gartner's articles is the compelled need and additional judicial burden to pursue multiple litigations just to convey title as it existed on the date the foreclosed mortgage was given. Given the present state of the law regarding the post-N/P Short-term Lease interest(s), passing title clear of those interests is achievable only by some post-foreclosure additional litigation.

Consequently, there is presently an irreconcilable conflict among various courts. The discrepancy is caused by the inherent inconsistency between: 1) the exact language of CPLR ' 6501, especially when considered along with the definitional provision in RPL '290; and 2) the goal of a foreclosure action enhanced by the salutary effect of an early filed N/P in a mortgage foreclosure action. To end such conflict and to obviate the need to clog court calendars with post-foreclosure plenary actions for either strict foreclosure or re-foreclosure ' or, perhaps some type of S/P-R ' it is this author's opinion that the problem noted here further suggests consideration to amending CPLR ' 6501 and, concomitantly, RPL ' 290. Any such revision should address not only the problem of post-N/P Short-term Leases but all interests in the mortgaged realty acquired, in any fashion, post-N/P.

Conclusion

It is submitted that all post-N/P acquired interests should be bound to the results of the foreclosure action. That is particularly true as to post-N/P Short-term Leases since, as a matter of fact and law, the post-N/P short-term interest holders were on actual, or at least constructive, notice of the pending foreclosure action, e.g., Holly Realty Co. v. Wortmann , 121 N.Y. Supp. 572; 1910 N.Y. Misc. LEXIS 688 (Mun. Ct., Manh. 6th Dist., 1910); CPLR ' 6501.

Joel David Sharrow is counsel to Moses & Singer LLP, Manhattan, specializing in various types of real-estate oriented, creditor rights and general commercial litigation. 'Joel David Sharrow, 2009.