Real Property Law

Prior Foreclosure Action Does Not Bar Action Against Guarantor

Hometown Bank of Hudson Valley v. Colucci

NYLJ 4/8/15, p. 27, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action by mortgagee against defaulting mortgagor's guarantor, mortgagee appealed from Supreme Court's grant of guarantor's motion to dismiss. The Appellate Division reversed, holding that the prior foreclosure action, in which the mortgagee bank accepted a deed in lieu of foreclosure, did not bar the action against the guarantor.

In 2006, mortgagee bank made three separate loans to corporate mortgagor, who was developing a residential subdivision. One was a construction loan, a second was a line-of-credit loan, and the third was a revolving credit loan. Corporate borrower executed separate notes and mortgages for the three loans. Guarantor executed a personal guaranty with respect to the revolving credit loan. When the borrower defaulted in April 2009, the bank sought to foreclose on the mortgages. Pursuant to a stipulation, the action was discontinued “without prejudice” against the guarantor. The bank then filed a supplemental summons and complaint seeking to foreclose only on the construction loan and the line-of-credit loan (the two loans not subject to guarantor's personal guaranty). The bank then took a deed in lieu of foreclosure to settle the foreclosure action, and then brought this action against guarantor. Supreme Court awarded summary judgment to grantor, concluding that the action was barred by RPAPL 1301(3), which requires a mortgagee to elect remedies between an action at law on the note or a proceeding in equity to foreclose. Mortgagee bank appealed.

In reversing, the Appellate Division held that RPAPL 1301 was designed to avoid multiple lawsuits, and operated only to preclude a mortgagee from simultaneously proceeding at law and in equity. In this case, because the prior foreclosure action had been settled and discontinued without the entry of any judgment, RPAPL 1301(3) was inapplicable. The court then turned to RPAPL 1371(3), which provides that in the absence of a motion for a deficiency judgment, the proceeds of a foreclosure sale shall be deemed to be in full satisfaction of the mortgage debt. The court held that section 1371(3) was also inapplicable because no foreclosure sale was conducted. As a result, guarantor was not entitled to summary judgment.

COMMENT

A mortgagee who has obtained a money judgment against a mortgagor may bring a subsequent foreclosure action without leave of court if execution of the mortgagee's judgment has been returned unsatisfied. In Jamaica Savings Bank v. Henry, 112 A.D.2d 920, the court reversed a dismissal of mortgagee's foreclosure action when plaintiff mortgagee had previously obtained judgment for the unpaid balance of a note secured by the mortgage. The court held that RPAPL 1301(3), which requires leave of court to bring an action to recover part of a mortgage debt while a foreclosure action is pending or after a judgment for the plaintiff in a foreclosure action, did not bar a foreclosure action after execution had been returned unsatisfied in an action on the underlying mortgaged debt.

By contrast, if mortgagee first brings a foreclosure action, the mortgagee may not later bring an action to recover the unpaid mortgage debt unless the mortgagee obtained permission in the foreclosure action. Thus, in Stein v. Blatte, 118 Misc.2d 633, the court invoked RPAPL 1301(3) to dismiss a second mortgagee's action on a mortgage debt when the second mortgagee had not obtained leave of the court in its pending foreclosure action. In that action, second mortgagee obtained a judgment of foreclosure, but then had its lien extinguished after the first mortgagee foreclosed and sold the property without surplus.

Under RPAPL 1371, the proceeds of a foreclosure sale are deemed to be in full satisfaction of a mortgage debt in the absence of a motion for a deficiency judgment, and the protections of this statute extends to guarantors as well. In Sanders v. Palmer, 68 N.Y.2d 180, the Court of Appeals affirmed the dismissal of plaintiff mortgagee's action seeking recovery of deficiency from a corporate debtor following a foreclosure sale. Mortgagee had received mortgages on three of corporate debtor's properties as collateral on its loan, which was also guaranteed by guarantor, who secured her guarantee with a mortgage on her own property. After corporate debtor's default, mortgagee sought to foreclose on one property covered by the corporate mortgage, and, in a later, separate action, on guarantor's mortgage. The Court of Appeals held that because mortgagee failed to move for a deficiency judgment within 90 days of foreclosing on the corporate property, RPAPL 1371(3) barred mortgagee from later foreclosing on guarantor's property. The court explained that the “party against whom such judgment is sought” within the meaning of RPAPL 1371(2) is not limited to the mortgagor, since a deficiency judgment in a prior foreclosure would have been binding on any guarantor as well .

Mortgage Contingency Clause

Dazzo v. Kilcullen

127 A.D.3d 1126, AppDiv, Second Dept.

(memorandum opinion)

In an action by purchasers for return of a down payment, purchasers appealed from Supreme Court's denial of their motion for summary judgment. The Appellate Division affirmed, holding that questions of fact remained about whether purchaser had provided adequate notice of cancellation pursuant to the sale contract's mortgage contingency clause.

On Jan. 13, 2006, purchaser contracted to buy the subject property for $580,000, putting down a down payment of $25,000. The mortgage contingency clause in the sale contract required a mortgage commitment by March 4, 2006, and gave purchasers a right to cancel if they had not obtained a mortgage by that date. If purchasers wanted to exercise the right to cancel, they had to provide written notice to seller within five business days of March 4. If purchasers did not provide that notice, purchasers would be deemed to have waived the right to cancel. On March 8, a mortgage lender notified purchasers that, because of the existence of a sump pump on the premises that appeared to be operating even in periods of no rain, the lender would not approve a mortgage without an inspection by a licensed engineer. Purchasers' lawyer immediately notified seller's lawyer about the situation, and requested that seller's lawyer contact purchasers' lawyer. Later, in April 2006, purchasers requested return of the down payment. When seller declined, purchasers brought this action and sought summary judgment. Supreme Court denied the summary judgment motion, and purchasers appealed.

In affirming, the Appellate Division conceded that purchasers had not been able to obtain the written mortgage commitment contemplated by the sale contract, but held that purchasers had not established that the March 2006 letter from purchaser's lawyer to seller's lawyer constituted the notice of cancellation required in order to entitle purchasers to return of their down payment. On that issue, the court concluded that questions of fact remained, requiring resolution at trial.

Partition and Sale Not in Interest of Either Party

Messina v. Mayer

NYLJ 5/13/15, p. 17, col. 2

Supreme Ct., Suffolk Cty.

(Tarantino, J.)

In a partition action by co-tenant Messina against cotenant Mayer, the court, after a non-jury trial, denied partition, but ordered Messina to make a payment to Mayer, while ordering Mayer to convey his interest to Messina, concluding that a partition and sale was not in the interest of either party.

Messina and Mayer had lived together for about three years when, in 2013, they purchased the subject property for $288,000. They were then contemplating a future marriage, and took title as joint tenants with right of survivorship. Because Mayer was not steadily employed, Messina made mortgage payments and tax payments on the house. The parties' relationship deteriorated by September 2013, and Mayer ultimately moved out of the house when Messina obtained an order of protection against him. Messina then brought this partition action. Mayer claimed that he and his family had built up sweat equity based on repairs they allegedly made to the house.

In denying partition, the court noted that despite the statutory right to partition, a partition action is essentially equitable in nature, and a court need not order partition in all cases. The court then held that cotenants are entitled to the reasonable value of improvements and repairs made to the premises if made in good faith. In this case, however, the court held that Mayer was not entitled to a credit for “sweat equity” because Mayer had produced insufficient evidence about the value of the work he put into the premises. The court concluded that actual partition of the premises could not be made without great prejudice to the owners, and determined that a sale would be inequitable if Messina could pay Mayer the equity due to him. The court therefore ordered Messina to pay Mayer half of the value of the equity in the house, minus amounts paid by Messina toward mortgage, tax and insurance payments, and amounts expended on repair of the premises.

Assignment of Mortgage Without Assignment of Note

Acocella v. Bank of New York Mellon

NYLJ 4/17/15, p. 24, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In mortgagors' action to quiet title, mortgagors appealed from Supreme Court's grant of mortgagee's motion to dismiss the complaint. The Appellate Division affirmed, holding that an assignment of the mortgage without assignment of the note did not entitled mortgagors to cancel the mortgage on their premises.

In 2004, mortgagors executed a note to borrow $546,000 from First Magnus. The note was secured by a mortgage against their home, and the mortgage and note were recorded on Jan. 3, 2005. On Oct. 4, 2011, Mortgage Electronic Registration Systems, Inc., as nominee for First Magnus, assigned the mortgage to defendant Bank of New York Mellon. Mortgagors, however, produced documentary evidence that First Magnus had assigned the note to Countrywide, which later assigned the note to Bank of New York Mellon. Mortgagors contend that First Magnus' assignment of the note to Bank of New York Mellon without transfer of the note rendered the mortgage a nullity and entitled mortgagors to cancellation of the mortgage. Supreme Court dismissed the complaint.

In affirming, the Appellate Division concluded that mortgagors had not raised a justiciable controversy. No one other than Bank of New York Mellon has claimed an interest in the mortgage or an entitlement to payments on the mortgage debt. Mortgagors are not in default on the mortgage, and Bank of New York Mellon has not sought to foreclose, so any challenge to Bank of New York Mellon's standing to foreclose on the mortgage was not properly presented in the action to cancel the mortgage.

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Prior Foreclosure Action Does Not Bar Action Against Guarantor

Hometown Bank of Hudson Valley v. Colucci

NYLJ 4/8/15, p. 27, col. 3

AppDiv, Second Dept.

(memorandum opinion)

In an action by mortgagee against defaulting mortgagor's guarantor, mortgagee appealed from Supreme Court's grant of guarantor's motion to dismiss. The Appellate Division reversed, holding that the prior foreclosure action, in which the mortgagee bank accepted a deed in lieu of foreclosure, did not bar the action against the guarantor.

In 2006, mortgagee bank made three separate loans to corporate mortgagor, who was developing a residential subdivision. One was a construction loan, a second was a line-of-credit loan, and the third was a revolving credit loan. Corporate borrower executed separate notes and mortgages for the three loans. Guarantor executed a personal guaranty with respect to the revolving credit loan. When the borrower defaulted in April 2009, the bank sought to foreclose on the mortgages. Pursuant to a stipulation, the action was discontinued “without prejudice” against the guarantor. The bank then filed a supplemental summons and complaint seeking to foreclose only on the construction loan and the line-of-credit loan (the two loans not subject to guarantor's personal guaranty). The bank then took a deed in lieu of foreclosure to settle the foreclosure action, and then brought this action against guarantor. Supreme Court awarded summary judgment to grantor, concluding that the action was barred by RPAPL 1301(3), which requires a mortgagee to elect remedies between an action at law on the note or a proceeding in equity to foreclose. Mortgagee bank appealed.

In reversing, the Appellate Division held that RPAPL 1301 was designed to avoid multiple lawsuits, and operated only to preclude a mortgagee from simultaneously proceeding at law and in equity. In this case, because the prior foreclosure action had been settled and discontinued without the entry of any judgment, RPAPL 1301(3) was inapplicable. The court then turned to RPAPL 1371(3), which provides that in the absence of a motion for a deficiency judgment, the proceeds of a foreclosure sale shall be deemed to be in full satisfaction of the mortgage debt. The court held that section 1371(3) was also inapplicable because no foreclosure sale was conducted. As a result, guarantor was not entitled to summary judgment.

COMMENT

A mortgagee who has obtained a money judgment against a mortgagor may bring a subsequent foreclosure action without leave of court if execution of the mortgagee's judgment has been returned unsatisfied. In Jamaica Savings Bank v. Henry, 112 A.D.2d 920, the court reversed a dismissal of mortgagee's foreclosure action when plaintiff mortgagee had previously obtained judgment for the unpaid balance of a note secured by the mortgage. The court held that RPAPL 1301(3), which requires leave of court to bring an action to recover part of a mortgage debt while a foreclosure action is pending or after a judgment for the plaintiff in a foreclosure action, did not bar a foreclosure action after execution had been returned unsatisfied in an action on the underlying mortgaged debt.

By contrast, if mortgagee first brings a foreclosure action, the mortgagee may not later bring an action to recover the unpaid mortgage debt unless the mortgagee obtained permission in the foreclosure action. Thus, in Stein v. Blatte, 118 Misc.2d 633, the court invoked RPAPL 1301(3) to dismiss a second mortgagee's action on a mortgage debt when the second mortgagee had not obtained leave of the court in its pending foreclosure action. In that action, second mortgagee obtained a judgment of foreclosure, but then had its lien extinguished after the first mortgagee foreclosed and sold the property without surplus.

Under RPAPL 1371, the proceeds of a foreclosure sale are deemed to be in full satisfaction of a mortgage debt in the absence of a motion for a deficiency judgment, and the protections of this statute extends to guarantors as well. In Sanders v. Palmer, 68 N.Y.2d 180, the Court of Appeals affirmed the dismissal of plaintiff mortgagee's action seeking recovery of deficiency from a corporate debtor following a foreclosure sale. Mortgagee had received mortgages on three of corporate debtor's properties as collateral on its loan, which was also guaranteed by guarantor, who secured her guarantee with a mortgage on her own property. After corporate debtor's default, mortgagee sought to foreclose on one property covered by the corporate mortgage, and, in a later, separate action, on guarantor's mortgage. The Court of Appeals held that because mortgagee failed to move for a deficiency judgment within 90 days of foreclosing on the corporate property, RPAPL 1371(3) barred mortgagee from later foreclosing on guarantor's property. The court explained that the “party against whom such judgment is sought” within the meaning of RPAPL 1371(2) is not limited to the mortgagor, since a deficiency judgment in a prior foreclosure would have been binding on any guarantor as well .

Mortgage Contingency Clause

Dazzo v. Kilcullen

127 A.D.3d 1126, AppDiv, Second Dept.

(memorandum opinion)

In an action by purchasers for return of a down payment, purchasers appealed from Supreme Court's denial of their motion for summary judgment. The Appellate Division affirmed, holding that questions of fact remained about whether purchaser had provided adequate notice of cancellation pursuant to the sale contract's mortgage contingency clause.

On Jan. 13, 2006, purchaser contracted to buy the subject property for $580,000, putting down a down payment of $25,000. The mortgage contingency clause in the sale contract required a mortgage commitment by March 4, 2006, and gave purchasers a right to cancel if they had not obtained a mortgage by that date. If purchasers wanted to exercise the right to cancel, they had to provide written notice to seller within five business days of March 4. If purchasers did not provide that notice, purchasers would be deemed to have waived the right to cancel. On March 8, a mortgage lender notified purchasers that, because of the existence of a sump pump on the premises that appeared to be operating even in periods of no rain, the lender would not approve a mortgage without an inspection by a licensed engineer. Purchasers' lawyer immediately notified seller's lawyer about the situation, and requested that seller's lawyer contact purchasers' lawyer. Later, in April 2006, purchasers requested return of the down payment. When seller declined, purchasers brought this action and sought summary judgment. Supreme Court denied the summary judgment motion, and purchasers appealed.

In affirming, the Appellate Division conceded that purchasers had not been able to obtain the written mortgage commitment contemplated by the sale contract, but held that purchasers had not established that the March 2006 letter from purchaser's lawyer to seller's lawyer constituted the notice of cancellation required in order to entitle purchasers to return of their down payment. On that issue, the court concluded that questions of fact remained, requiring resolution at trial.

Partition and Sale Not in Interest of Either Party

Messina v. Mayer

NYLJ 5/13/15, p. 17, col. 2

Supreme Ct., Suffolk Cty.

(Tarantino, J.)

In a partition action by co-tenant Messina against cotenant Mayer, the court, after a non-jury trial, denied partition, but ordered Messina to make a payment to Mayer, while ordering Mayer to convey his interest to Messina, concluding that a partition and sale was not in the interest of either party.

Messina and Mayer had lived together for about three years when, in 2013, they purchased the subject property for $288,000. They were then contemplating a future marriage, and took title as joint tenants with right of survivorship. Because Mayer was not steadily employed, Messina made mortgage payments and tax payments on the house. The parties' relationship deteriorated by September 2013, and Mayer ultimately moved out of the house when Messina obtained an order of protection against him. Messina then brought this partition action. Mayer claimed that he and his family had built up sweat equity based on repairs they allegedly made to the house.

In denying partition, the court noted that despite the statutory right to partition, a partition action is essentially equitable in nature, and a court need not order partition in all cases. The court then held that cotenants are entitled to the reasonable value of improvements and repairs made to the premises if made in good faith. In this case, however, the court held that Mayer was not entitled to a credit for “sweat equity” because Mayer had produced insufficient evidence about the value of the work he put into the premises. The court concluded that actual partition of the premises could not be made without great prejudice to the owners, and determined that a sale would be inequitable if Messina could pay Mayer the equity due to him. The court therefore ordered Messina to pay Mayer half of the value of the equity in the house, minus amounts paid by Messina toward mortgage, tax and insurance payments, and amounts expended on repair of the premises.

Assignment of Mortgage Without Assignment of Note

Acocella v. Bank of New York Mellon

NYLJ 4/17/15, p. 24, col. 2

AppDiv, Second Dept.

(memorandum opinion)

In mortgagors' action to quiet title, mortgagors appealed from Supreme Court's grant of mortgagee's motion to dismiss the complaint. The Appellate Division affirmed, holding that an assignment of the mortgage without assignment of the note did not entitled mortgagors to cancel the mortgage on their premises.

In 2004, mortgagors executed a note to borrow $546,000 from First Magnus. The note was secured by a mortgage against their home, and the mortgage and note were recorded on Jan. 3, 2005. On Oct. 4, 2011, Mortgage Electronic Registration Systems, Inc., as nominee for First Magnus, assigned the mortgage to defendant Bank of New York Mellon. Mortgagors, however, produced documentary evidence that First Magnus had assigned the note to Countrywide, which later assigned the note to Bank of New York Mellon. Mortgagors contend that First Magnus' assignment of the note to Bank of New York Mellon without transfer of the note rendered the mortgage a nullity and entitled mortgagors to cancellation of the mortgage. Supreme Court dismissed the complaint.

In affirming, the Appellate Division concluded that mortgagors had not raised a justiciable controversy. No one other than Bank of New York Mellon has claimed an interest in the mortgage or an entitlement to payments on the mortgage debt. Mortgagors are not in default on the mortgage, and Bank of New York Mellon has not sought to foreclose, so any challenge to Bank of New York Mellon's standing to foreclose on the mortgage was not properly presented in the action to cancel the mortgage.

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