Cooperatives & Condominiums

Supreme Ct., Suffolk Cty.

(Molia, J.)

In an action to foreclose a mortgage on a condominium unit, mortgagee bank moved for an order compelling the condominium board to refund common charges allegedly paid erroneously, and for an order requiring the condominium board to issue a letter stating that all current common charges had been paid. The court denied the motion for a refund, and ordered the condominium board to issue the letter, but only after mortgagee paid all common charges due from the date the mortgagor first defaulted.

Mortgagor first executed a mortgage on July 24, 2006, and first defaulted on Nov. 1, 2006. Mortgagee bank brought this foreclosure action on May 4, 2009, and obtained a judgment of foreclosure and sale on May 17, 2010. Mortgagee bank purchased the property at the foreclosure sale for $100, and is in the process of reselling the property. Meanwhile, mortgagor had also defaulted on payment of common charges to the condominium. The board filed a lien for common charges, and as of the date of the foreclosure sale, mortgagor owed more than $38,000 in common charges. In preparation for the foreclosure sale, mortgagee's counsel prepared “Terms of Sale,” which were ultimately signed by the referee. The Terms of Sale provided that the property would be sold subject to “outstanding condominium charges, if any.” The bank made a $12,336.46 payment to the condominium board on Jan. 26, 2011. The check bore the legend “For Payment of Misc Foreclosure or Bankruptcy Expenses.” The bank also made two subsequent payments of $606.82, each bearing the same legend. On the instant motion, the bank contended that those checks were overpayments made due to an accounting mistake, and argued that it bears liability for common charges only for the period subsequent to the date of the foreclosure sale. As a result, the bank sought a refund of the overpayment, and a letter from the board indicating that common charges were current.

The court rejected the bank's arguments, concluding that the bank was bound by the Terms of Sale, which were drafted by its own counsel. Because the Terms provided that the sale was subject to outstanding common charges, the bank was liable for those charges from date of the mortgagor's first default. Only upon payment of those charges was the condominium board required to provide the letter requested by the bank.

COMMENT

A purchaser at a foreclosure sale of a residential condominium unit does not ordinarily buy subject to a requirement that the common charges be paid, unless the “terms of sale” explicitly require for payment of such charges. Real Property Law section 339-z establishes that a board's lien for common charges is subordinate to “all sums unpaid on a first mortgage of record.” In Bankers Trust Co. v. Bd of Managers of the Park 900 Condo, 81 N.Y.2d 1033, the Court of Appeals rejected the condo board's argument that its lien for unpaid common charges was not extinguished and should be paid out of the proceeds of the foreclosure sale. Although the board relied on section 339-z, which provides that “upon sale or conveyance of a unit, such unpaid common charges shall be paid out of the sale proceeds or by the grantee,” the court held that the language is not applicable in the case of a foreclosure sale, except to the extent there the sale proceeds exceed the amount of the first mortgage. See also Dime Savings Bank of NY v. Kakar, 203 A.D.2d 50 (holding that upon a foreclosure sale, if no surplus exists after the satisfaction first mortgage, the Board's lien for unpaid common charges is extinguished.)

Even when a condominium's declaration provides that the lien for past-due assessment must be satisfied by the grantee if there are no surplus proceeds received on the foreclosure sale, the declaration is ineffective to overcome the priority of the first mortgagee. Thus, in Crossland Savings Bank, FSB, v. Saffer, 153 Misc. 2d 287, the court held that on the foreclosure of a first mortgage, the bank, as foreclosure sale purchaser, was not liable for the homeowner association fees despite language in the association's declaration purporting to require grantees to bear liability for those fees.

In circumstances not involving common charges, courts have held that foreclosure purchasers are bound by terms of sale. For example, in Zweig v. Tolchin, 32 Misc. 3d 1201A, the court refused to set aside the sale at the behest of a successful bidder whose closing on the condominium unit was delayed for three years. At the time of the foreclosure sale, litigation was ongoing about the mortgagee's right to foreclose, and the court invoked the terms of sale to establish that purchaser bought the property subject to “[a]ny notice of appeal(s) of the judgment of foreclosure and sale.” In Deutsche Bank National Trust Co., the terms of sale explicitly provided for payment of common charges by the purchaser, which was the bank; in light of Zweig, it is not surprising that the court didn't use its equitable powers to vary the terms of the sale and set aside the common charges. Courts will generally only employ such equitable powers when there is evidence that “fraud, collusion, mistake or misconduct casts suspicion on the fairness of the transaction.” Zweig v. Tolchin, 32 Misc. 3d 1201A.

Mortgagee Who Purchases At Foreclosure Sale Liable For Condominium Common Charges

Deutsche Bank National Trust Co. v. Tabares

NYLJ 10/18/11, p. 21, col. 2

Supreme Ct., Suffolk Cty.

(Molia, J.)

In an action to foreclose a mortgage on a condominium unit, mortgagee bank moved for an order compelling the condominium board to refund common charges allegedly paid erroneously, and for an order requiring the condominium board to issue a letter stating that all current common charges had been paid. The court denied the motion for a refund, and ordered the condominium board to issue the letter, but only after mortgagee paid all common charges due from the date the mortgagor first defaulted.

Mortgagor first executed a mortgage on July 24, 2006, and first defaulted on Nov. 1, 2006. Mortgagee bank brought this foreclosure action on May 4, 2009, and obtained a judgment of foreclosure and sale on May 17, 2010. Mortgagee bank purchased the property at the foreclosure sale for $100, and is in the process of reselling the property. Meanwhile, mortgagor had also defaulted on payment of common charges to the condominium. The board filed a lien for common charges, and as of the date of the foreclosure sale, mortgagor owed more than $38,000 in common charges. In preparation for the foreclosure sale, mortgagee's counsel prepared “Terms of Sale,” which were ultimately signed by the referee. The Terms of Sale provided that the property would be sold subject to “outstanding condominium charges, if any.” The bank made a $12,336.46 payment to the condominium board on Jan. 26, 2011. The check bore the legend “For Payment of Misc Foreclosure or Bankruptcy Expenses.” The bank also made two subsequent payments of $606.82, each bearing the same legend. On the instant motion, the bank contended that those checks were overpayments made due to an accounting mistake, and argued that it bears liability for common charges only for the period subsequent to the date of the foreclosure sale. As a result, the bank sought a refund of the overpayment, and a letter from the board indicating that common charges were current.

The court rejected the bank's arguments, concluding that the bank was bound by the Terms of Sale, which were drafted by its own counsel. Because the Terms provided that the sale was subject to outstanding common charges, the bank was liable for those charges from date of the mortgagor's first default. Only upon payment of those charges was the condominium board required to provide the letter requested by the bank.

COMMENT

A purchaser at a foreclosure sale of a residential condominium unit does not ordinarily buy subject to a requirement that the common charges be paid, unless the “terms of sale” explicitly require for payment of such charges. Real Property Law section 339-z establishes that a board's lien for common charges is subordinate to “all sums unpaid on a first mortgage of record.” In Bankers Trust Co. v. Bd of Managers of the Park 900 Condo, 81 N.Y.2d 1033, the Court of Appeals rejected the condo board's argument that its lien for unpaid common charges was not extinguished and should be paid out of the proceeds of the foreclosure sale. Although the board relied on section 339-z, which provides that “upon sale or conveyance of a unit, such unpaid common charges shall be paid out of the sale proceeds or by the grantee,” the court held that the language is not applicable in the case of a foreclosure sale, except to the extent there the sale proceeds exceed the amount of the first mortgage. See also Dime Savings Bank of NY v. Kakar, 203 A.D.2d 50 (holding that upon a foreclosure sale, if no surplus exists after the satisfaction first mortgage, the Board's lien for unpaid common charges is extinguished.)

Even when a condominium's declaration provides that the lien for past-due assessment must be satisfied by the grantee if there are no surplus proceeds received on the foreclosure sale, the declaration is ineffective to overcome the priority of the first mortgagee. Thus, in Crossland Savings Bank, FSB, v. Saffer, 153 Misc. 2d 287, the court held that on the foreclosure of a first mortgage, the bank, as foreclosure sale purchaser, was not liable for the homeowner association fees despite language in the association's declaration purporting to require grantees to bear liability for those fees.

In circumstances not involving common charges, courts have held that foreclosure purchasers are bound by terms of sale. For example, in Zweig v. Tolchin, 32 Misc. 3d 1201A, the court refused to set aside the sale at the behest of a successful bidder whose closing on the condominium unit was delayed for three years. At the time of the foreclosure sale, litigation was ongoing about the mortgagee's right to foreclose, and the court invoked the terms of sale to establish that purchaser bought the property subject to “[a]ny notice of appeal(s) of the judgment of foreclosure and sale.” In Deutsche Bank National Trust Co., the terms of sale explicitly provided for payment of common charges by the purchaser, which was the bank; in light of Zweig, it is not surprising that the court didn't use its equitable powers to vary the terms of the sale and set aside the common charges. Courts will generally only employ such equitable powers when there is evidence that “fraud, collusion, mistake or misconduct casts suspicion on the fairness of the transaction.” Zweig v. Tolchin, 32 Misc. 3d 1201A.