Co-ops and Condominiums

In reversing, the Appellate Division acknowledged that a first mortgage enjoys priority over the lien of a condominium association, but held that GMAC had failed to establish that the Scappaticci mortgage was unenforceable. As a result, GMAC had failed to establish that it held a first mortgage on the property. Summary judgment, therefore, was not warranted.

Comment

Under Real Prop. Law §339-z, a condominium association's lien for non-payment of common charges has priority over all other liens except for unpaid amounts on a recorded first mortgage. In Bankers Trust Co. v. Board of Managers of Park 900 Condominium, 81 N.Y.2d 1033 (1993), the Court of Appeals affirmed the First Department's judgment, concluding that to the extent there were no proceeds in excess of the first mortgage, Bankers Trust's first mortgage foreclosure sale extinguished the condominium board's statutory lien. Although both parties simultaneously commenced foreclosure proceedings to satisfy their outstanding liens against the subject condominium units, the board's statutory lien was not paid out of the proceeds of the bank's foreclosure sale because the lien was subordinate to the recorded first mortgage.

Under the statute, a consolidation and extension agreement, recorded prior to a condominium board's common charges lien, constitutes the first mortgage of record. In Plotch v. Citibank, N.A., 27 N.Y.3d 477 (2016), the Court of Appeals affirmed the Second Department's order, concluding that a plaintiff's purchase of a condominium unit at a condominium board's foreclosure auction was subject to the entire consolidated mortgage rather than the initial mortgage. The defendant bank extended two mortgages to the previous unit owner in the aggregate amount of $92,000.00 and consolidated both into a single mortgage. Several years later, the condominium board filed a common charges lien against the unit for unpaid common charges. The purchaser at the condominium's foreclosure sale commenced an action to establish that it took free of the consolidated mortgage, alleging that the bank's second mortgage was extinguished by the foreclosure sale because the common charges lien had priority over that mortgage. Since the consolidated mortgage was recorded years before the common charges lien, the court regarded the consolidated mortgage as the first mortgage of record. The court focused on how providing priority to a common charges lien recorded years after the filing of a consolidation agreement might adversely impact a condominium unit's owner ability to refinance.

Unless all mortgages are consolidated into a single mortgage, only the senior recorded consolidated mortgage enjoys priority over the condominium board's subsequent common charges lien. In CFC Specialty Program Mgrs., LLC v. AB Funding Corp., N.Y. Misc. LEXIS 1118 (2018), the trial court concluded that the defendant condominium board's lien was superior to one of the consolidated mortgages at issue. All twenty-four of the subject property's mortgages were consolidated into three mortgages essentially known as: the "Acquisition Loan," the "Building Loan," and the "Project Loan." Plaintiff CFC Specialty Program Managers, LLC commenced an action seeking to foreclose on the "Project Loan," alleging that all three loans constituted a first mortgage of record because they were recorded before the condominium board's common charges lien was filed. The court rejected the argument, concluding that the condominium board's lien enjoyed second lien status behind the "Acquisition Loan," which was the first of the consolidated mortgages to be recorded. Therefore, the "Project Loan" did not qualify as the first mortgage of record.

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Business Judgment Rule Precludes Challenge to Cancellation of Shares

Patel v. Gardens at Forest Hills Owners Corp. NYLJ 3/6/20, p. 27, col. 4 AppDiv, Second Dept. (memorandum opinion)

In co-op shareholder's action for declaratory and injunctive relief preventing the co-op corporation from selling her shares and terminating her lease, shareholder appealed from Supreme Court's denial of a preliminary injunction. The Appellate Division affirmed, holding that, in light of the business judgment rule, shareholder had not established any likelihood of success on the merits.

Shareholder's proprietary lease required her to obtain the written consent of the co-op corporation before making alterations or additions to water, gas, electrical conduits, plumbing fixtures or other installation or facility in the apartment. In June 2017, the co-op corporation served shareholder with a notice to cure because she had renovated her apartment without prior approval. Shareholder took no action during the cure period. The corporation then served her with a notice her shares would be cancelled and her lease terminated as of Aug. 4, 2017. The corporation then scheduled a sale to be held on October 4. On October 2, shareholder brought this action and moved for a preliminary injunction preventing the sale of her shares and lease. Supreme Court denied the motion and shareholder appealed.

In affirming, the Appellate Division emphasized that the evidentiary submissions conclusively established that shareholder had renovated the apartment without the co-op's prior written consent in violation of the lease. As a result, shareholder had not cognizable course of action, especially in light of the business judgment rule. The court held that shareholder's conclusory allegations of bad faith, made without a factual basis, were insufficient to justify a preliminary injunction because shareholder had failed to demonstrate a likelihood of success on the merits.