When a foreclosure auction sale date finally arrives in a New York foreclosure case, lenders and servicers are typically most anxious to proceed to the closing and obtain the amount bid. But in the real world there are myriad circumstances which can delay the scheduling of a closing date: a bidder not dedicated to closing, or a bidder’s perceived objections to title. Such problems are, of course, commonplace. But what is the status of real estate taxes and interest during the hiatus from the presumed closing date (30 days after the auction) and the actual closing date whenever that arrives, weeks, months or even years thereafter?
Unreported cases (which are not precedent even were they known) had ruled favorably for servicers regarding interest. [See citations at 3 Bergman On New York Mortgage Foreclosures § 30.05 [d][xi], LexisNexis Matthew Bender (rev. 2009)]. A new case at the appeals level [NYCTL 1996–1 Trust and Bank of New York v. EM-ESS Petroleum Corp., 57 A.D. 3d 304, 869 N.Y.S. 2d 71 (1st Dept. 2008)] now confirms these meaningful principles:
It should be apparent that these rules have major monetary consequences (helpful ones) for lenders and servicers so that a bit more explanation to explore the basis can be helpful.
First as to real estate taxes, statute in New York [RPAPL § 1354(2)] requires the referee to pay out of foreclosure sale proceeds real estate taxes which are a lien on the property at the time of the sale. This is why foreclosing lenders need to take real estate taxes into account when computing a bid or upset price: those taxes will be deducted from the total recovered. Lenders’ counsel can determine the amount of taxes which will be a lien on the date the auction sale is scheduled. But it becomes impossible to assess what taxes might be due at an indeterminate date in the future, such as when the closing is postponed.
As the new case confirms, though, this is not a problem. When the statute refers to the “sale”, it means the date of the auction sale – not the ultimate closing date when the deed is delivered. This post-auction tax accrual expense thus falls to the bidder.
The new case also addressed the issue of delay in relation to interest on the bid. Using as an example numbers from a residential perspective, suppose the sum due the lender is $500,000. The bidding concludes at $520,000 on July 1 so that when taxes are paid out of proceeds (with other expenses) the net to the lender is $500,000; it is made whole. Having typically added interest to the upset price for 30 days (the usual expected closing date), the lender is indeed fully compensated.
Should the closing be postponed, however, interest on the bid will be lost – unless the terms of sale impose the obligation upon the bidder to pay that interest and law will enforce the provision. The new case says the law will so enforce.
Underscoring how meaningful this can be are the facts in the commercial foreclosure case which is the subject of this alert. After the foreclosure auction in June 1999, the bidder discovered that the property had been designated by the state as an “oil spill site” which meant substantial cleanup expense and the time to accomplish it. Even though the referee offered to return the deposit (whether that was required is problematic, but not an issue in the case) the bidder chose to pursue a settlement with the state. That process consumed an astounding nine years and finally when a closing was held, the bidder litigated the question of paying interest on the bid for all those years. As noted, the court said yes, it was due and had to be paid; much comfort for lenders.
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.