Bizarre Liability To Lender Upon Co-Op Foreclosure Sale


1 December, 2014


Mortgage Lender and Servicer Alerts

How about this for a revolting development.  Lender bids in at sale and becomes liable for some prior debts which attached to the property.  It should be noted immediately that this would not happen in the more common real estate foreclosure – house, shopping center, condo and so forth.  But it can happen in a co-op foreclosure, as reported cases instruct.  [Berkowners, Inc. v. Dime Sav. Bank of New York, 286 A.D.2d 695, 730 N.Y.S.2d 339 (2d Dept. 2001); Lombard v. Station Square Inn Apartments Corp., 94 A.D.3d 717, 942 N.Y.S.2d 116 (2d Dept. 2012)].

To be sure, co-op loans, and therefore co-op foreclosures, are less in number than mortgage loans and mortgage foreclosures.  But when a co-op foreclosure is pursued, what appears to be a counterintuitive principle should be noted.

Co-ops are odd creatures to begin with and often confusing because they represent an interest in personal property, not real estate.  By its very nature, then, the co-op creates different documents, different relationships and different servicing requirements.

A critical element of the co-op scenario is that the owner must pay maintenance on a regular basis (usually monthly) to the co-op corporation – failing in which the co-op can take the unit and cut off the lender’s security interest.  (The lender’s interest is usually thought of as a “mortgage”, but in actuality it is a security interest in personalty.)  Indeed, a lender itself can foreclose if the borrower-unit owner neglects to pay maintenance to the co-op, even though loan payments may be current to the lender.

Well, suppose that happens and after the foreclosure at which the lender is the purchaser, the co-op comes along and says to the lender:  “not only are you responsible for maintenance going forward from the time you purchased, you are liable for all your borrower’s arrears for all the months he didn’t pay that maintenance. And we have a lien on the property you bought (the shares in the co-op) for those past due sums – a lien which is senior to and survives your foreclosure.

Can it be so?  It can be, which is just what the cases tell us. And the ultimate basis for the result was that the stock certificate itself said so.

To further explain, the stock certificate (which the borrower pledged to the lender as security for the loan to “buy the unit”) recited on its face that the co-op corporation had a first lien on the shares for all rent to become payable by the shareholder.  In turn, co-op shares are deemed securities and so are governed by UCC Article 8.  That article holds that a lien of an issuer upon a security is valid against a purchaser (here the lender) only if the issuer’s lien is noted conspicuously on the security certificate.

Because the certificate here did recite the lien, the co-op’s claim was superior to that of the foreclosing lender and continued to burden the shares. So, we have yet another concern in the co-op arena.  Like prior taxes in the real estate foreclosure situation, prior maintenance charges can be a surviving debt. Read the share certificates.

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.