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January 10, 2024

An Overview of New York State's Mortgage Foreclosure Process

This alert considers various aspects of New York State’s judicial foreclosure process as controlled by Article 13 of the Real Property Actions and Proceedings Law (RPAPL) and the Civil Practice Law and Rules (CPLR). While there are numerous specific procedural requirements with respect to residential mortgage lending, those requirements are beyond the scope of this alert, which is intended to highlight the basic tenets applicable to both residential and commercial foreclosures.  

Statute of Limitations

Typically, a mortgage loan transaction is evidenced by a promissory note that is not filed in public records and a mortgage recorded with the clerk of the county in which the property is located. The statute of limitations (SOL) for commencing an action to foreclose a mortgage as a result of payment defaults is six years. The SOL bars recovery of only installments that became due more than six years prior to commencement of the action; recovery of payments due within the six year period is permitted. If the mortgage contains a provision entitling the mortgagee upon default to accelerate the entire balance owed—which is very common—the foreclosure action must be commenced within six years following acceleration and can include any defaulted payments within the six prior years.

Foreclosure Procedure  

Putting aside prerequisites to a residential mortgage foreclosure, required foreclosure pleadings are a summons and a complaint, which are typically prepared after examination of a professionally prepared title search or foreclosure certificate identifying all indispensable, necessary, and permissible defendants and, almost invariably (as described below), a notice of pendency, all of which are filed simultaneously. The foreclosing party must name as defendants and properly serve the owner of the mortgaged property and all persons holding liens or interests in the property that are inferior to the lien of the mortgage being foreclosed (including any such persons who are not known) so those liens and interests can be terminated by the judgment sought in the action.  

After being served, all defendants may file an answer to or move against the foreclosure complaint, file a general or limited notice of appearance in the action, or choose to default. If an answer is interposed, the foreclosing plaintiff has the option to conduct discovery under the CPLR or move for summary judgment. If the answer or motion can be overcome and all other defendants default, the plaintiff then requests the court to appoint a referee (an officer of the court) to compute the amount owed on the mortgage debt and determine whether the property should be sold as a whole or in parcels. After the referee reports this information to the court, the plaintiff can move for a judgment of foreclosure and sale and appointment of a referee (generally the same person who reported the amount due) to sell the property by public auction. 

After a foreclosure judgment is granted, the referee must publish a notice of the sale; depending on the location of the property, the referee must also post a notice of the sale. The sale is typically conducted between 28 and 35 days after the date of first publication. The referee conducts the auction according to terms of sale typically prepared by the plaintiff’s attorney. Most often, they require a 10 percent down payment at the conclusion of bidding and the signing of a memorandum of sale, which theoretically becomes the high bidder’s purchase contract with the court. Typically, the plaintiff submits the opening bid. If active bidding follows, the referee will accept the highest bid, collect the required deposit, and thereafter deliver a referee’s deed to the successful bidder within 30 days upon payment of the balance of the bid. No deposit is required if the plaintiff’s bid is accepted.

Notice of Pendency

Governed by CPLR Article 65, a notice of pendency (lis pendens) provides the world with constructive notice that an action affecting right, title, use, or enjoyment of real property has been commenced. Anyone recording a conveyance, lien, or encumbrance against the subject property thereafter is bound by all proceedings in a foreclosure action as if named as a party. For that reason, a notice of pendency is generally filed upon commencement of a foreclosure action, although the RPAPL only requires that this notice be filed at least 20 days prior to the granting of the foreclosure judgment.

Right of Redemption  

Up to the moment the referee accepts a bid for the property, the mortgagor retains the right to redeem the property by paying the mortgagee all amounts required by the foreclosure judgment. Importantly, not only the mortgagor but any person owning a legal or equitable interest in the property derived from the mortgagor has the right to redeem the property from the lien of the mortgage.

Deficiency Judgment

RPAPL § 1371 provides that if a person liable for a mortgage debt is made a defendant in a foreclosure action and personally served with the summons and complaint, or has voluntarily appeared in the action, the court may adjudge that person liable for any deficiency that results from the referee’s sale or so much thereof as the court determines to be just and equitable (known as a deficiency judgment). 

To trigger the possibility of obtaining a deficiency judgment, the mortgagee must commence a proceeding or file a motion against all obligors of the mortgage debt within 90 days after delivery of the referee’s deed to the high bidder. The amount of the deficiency is determined by the court by calculating the difference between the amount awarded in the judgment, plus any amounts secured by superior liens on the property with interest and referee’s fees, less the greater of the amount bid at the sale or the fair market value of the property on the day of the sale. Both the plaintiff and defendant can submit proof of that value, but the court has discretion to determine the fair market value. If the court determines that a deficiency exists, a money judgment in that amount may be entered in favor of the plaintiff against all persons adjudged to be liable for the mortgage debt.

Eviction After Foreclosure Sale

If, after delivery of the referee’s deed to the high bidder, the mortgagor, tenants, or any other persons occupying the property refuse to vacate it, the new owner may use either of two available procedures to seek eviction of those person(s): 1) a motion to the foreclosure court for a writ of assistance or 2) a special proceeding in a lower court pursuant to RPAPL § 715(5).

Surplus Money Proceeding  

As stated, any inferior liens on the mortgaged property will be cut off by the foreclosure judgment if the holders are named as defendants or served as unknown (John Doe) defendants. If the referee’s sale results in a “surplus” (sale proceeds in excess of the amount adjudged owed to the plaintiff), any person whose lien on the property was terminated by the judgment or who otherwise has a claim to the surplus may file a notice of claim with the court and, not sooner than three months after the filing of a motion to confirm the referee’s sale, a motion demanding the surplus. Notice of the motion must be served on the property owner and all persons who appeared in the action, had a subordinate lien on the property, or filed a claim to the surplus. The court can hold a hearing to determine the amounts and priorities of all filed claims or refer that task to a referee to consider and report on that information, with the court making the final determination.

Like Connecticut’s, New York State’s mortgage foreclosure process is complicated. Knowledge of the framework described above can be very helpful in navigating the statutory and common law idiosyncrasies of that process.

The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Frank Heller, partner, at fheller@barclaydamon.com; Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practices Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com; or Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com.
 

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