Tax Foreclosures: Notice to Mortgagees

Meanwhile, Roslyn Jane had defaulted on payment of real estate taxes. On Oct. 10, 2010, and Jan. 19, 2011, Nassau County sent notices of a tax lien sale to Roslyn Jane at the address it had provided to the county. There is no evidence that the county sent notices to UCB, then the mortgagee of record, or to any other mortgagee.

In February 2011, L & L Associates purchased the tax lien. Nearly two years later, in January 2013, L & L served notices to redeem on Roslyn Jane and on UCB at its Manhattan address. L & L sent the notices both by first-class mail and by certified mail, return receipt requested. The return receipt on the Roslyn Jane mailing was returned as unclaimed and unable to forward. The return receipt on the UCB mailing was returned with an illegible signature and no printed name. The first-class mailings were not returned to L & L. When L & L then submitted an affidavit stating that notice to redeem had been provided, the Nassau County Treasurer issued a tax deed. East West then brought this proceeding challenging the Treasurer's issuance of the tax deed, alleging that the county had failed to comply with the county administrative code by failing to provide notice of the tax lien sale to UCB as mortgagee. Supreme Court dismissed the proceeding, and East West appealed.

The Second Department reversed, holding that an issue remained about whether the county's failure to provide UCB with notice of the tax lien sale complied with due process requirements, and that questions of fact remained about whether L & L complied with due process requirements regarding the notice it sent to UCB about redemption rights. In particular, the court questioned whether notice to UCB was adequate in light of UCB's closing more than three years before the notice was sent out, and highlighted an outstanding fact issue about L & L's knowledge of the closing. As a result, the court held that further discovery was necessary, precluding summary resolution of the dispute. The court converted the proceeding into a RPAPL article 15 proceeding to determine competing claims to real property.

Background Law

In New York, foreclosure of tax liens involves a combination of state statute, local law, and the federal constitution. Article 11 of the Real Property Tax Law provides a statutory mechanism for foreclosure of tax liens. RPTL Section 1125(1)(a) requires notice of a tax foreclosure proceeding to every party whose interest would be affected by the foreclosure, so long as the party's name and address are readily ascertainable from the public record. Section 1125(1)(e) provides that the public record includes information filed in the local recording office. If article 11 were applicable, it would be clear that the county in East West would have been obligated to provide notice of a tax foreclosure proceeding to UCB.

RPTL Section 1104(2), however, provides that article 11 does not apply to counties, cities or towns that had historically been authorized to use their own methods for collecting delinquent taxes, and who had, before 1994, adopted a local law providing that the historical method would continue in force. Nassau County's administrative code includes provisions for enforcement of tax liens, but L & L argued that the code does not require notice to mortgagees unless the mortgagee's name appears on the county tax assessment roll.

Even if L & L were correct, the Nassau County administrative code cannot dispense with federal constitutional notice requirements. In Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 800, the United States Supreme Court held that mortgagees whose interests are reasonably ascertainable are entitled to notice by mail of tax foreclosure proceedings. As a result, UCB's interest — which ultimately passed to East West — could not be extinguished without mail notice to UCB.

A remaining question is whether proper notice of the redemption right would be sufficient to comply with due process even if notice of the foreclosure proceeding were inadequate. In a case presenting the converse situation, the Court of Appeals has held that notice of expiration of a redemption right is not constitutionally required once an owner receives constitutionally adequate notice of the tax foreclosure proceeding. In re Foreclosure of Tax Liens, 18 N.Y.3d 634. One might argue that so long as a mortgagee receives notice that enables the mortgagee to avoid loss of its interest by redeeming the property, the notice is constitutionally adequate. On the other hand, at the redemption stage, mortgagee may already have lost the right to take actions that would have been available had the mortgagee received earlier notice of the foreclosure itself.

Conclusion

The final question raised by the East West case involves L & L's obligation to provide notice to East West as a successor in interest to the UCB mortgage. East West did not record its interest in the subject property until after L & L served its notice to redeem, so ordinary public records would not have revealed East West's interest. As a result, even RPTL section 1125, if it were applicable, would not have required notice to East West. If, however, L & L had actual notice of UCB's closing and/or East West's acquisition of the mortgage, the court suggests that L & L might have had an obligation to provide notice to East West.

***** Stewart E. Sterk, Mack Professor of Law at Benjamin Cardozo School of Law, is the Editor-in-Chief of this newsletter.