Assignment Of Mortgage; Watch Those Dangerous Tax Lien Foreclosures
Perhaps this is obvious. If the holder of a real estate tax lien completes a foreclosure upon that lien (and sells the property to a new owner) that is not the time to take an assignment of a mortgage on that property and begin a mortgage foreclosure action. The reason of course is that the mortgage will have been extinguished. Unfortunately, this was not apparent to the mortgage assignee who committed such a gaffe in a recently reported case [244 Lenox Avenue LLC v. Bazelais, 126 A.D.3d 604, 6 N.Y.S.3d 237 (1st Dept. 2015).]
The problem here most likely arose from lack of due diligence in the taking of an assignment of mortgage. While this particular situation does not appear to be part of a bulk assignment, the latter is an arena fraught with availability of errors. Care in determining the precise status of any mortgage being taken by assignment is essential (albeit maybe sometimes difficult to achieve) highlighted by the result of this case where the assignee of the mortgage in the end purchased nothing.
It is no doubt widely understood that real estate taxes are always senior to a mortgage, even if those taxes have arisen subsequent to the date of the mortgage. Thus, if there are delinquent taxes, and those delinquencies ripen into some variety of tax lien foreclosure action, the conclusion of that action will extinguish all junior interests – including of course mortgages – so long as the necessary procedures were followed in that foreclosure. To be sure, there is much room for a tax lien foreclosing party (often a governmental entity) to stumble so that the proceeding can later be assaulted. But that is not an enviable position to be in when the entire mortgage may be at issue, which was just what happened in this case.
Here, it was New York City enforcing its own tax lien. It happened to be by what is called an “in rem” proceeding, which is a seldom used short-form version of a tax lien foreclosure action. Without exploring the minutia of that procedure, or that methodology as opposed to a full-blown foreclosure action, the fact was that New York City commenced the in rem foreclosure in January 2008 and received a final judgment in February 2011. Under the in rem approach, the final judgment is what extinguishes anything junior, without necessity for an actual sale. In any event, it was only four months after the judgment that the hapless party purchased a note and mortgage from the bank which held it. When the property owner not surprisingly defaulted upon the mortgage obligation, the mortgage assignee began the action which led to the subject decision, an action seeking to both foreclose the mortgage and invalidate the judgment which arose from the tax lien foreclosure action.
But the mortgage assignee failed. New York City had followed the somewhat obscure requirements to perfect an in rem title while the mortgage assignee had failed to in any way register itself to receive any notice. The assignee thus had no basis to challenge the tax lien foreclosure action or the title of the ultimate purchaser from the City of New York.
In the end, for want of carefully assessing any dangers to the mortgage through failure to pay taxes, the assignee wound up with nothing – except legal expense in a failed effort to challenge the tax title. The lesson of all this remains obvious and is a restatement of what was previously noted: care in examining tax delinquencies and possible tax actions upon a mortgaged property is quite critical.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.