Can They Foreclose The Tax Lien Without Notice To The Mortgage Assignee?
In one context no, in another, yes. This is an especially vital subject for lenders and servicers and so is well worthy of explanation here, spurred by a new case on the subject. [U.S. Bank Natl. Association v. Denisco, 96 A.D.3d 1659, 949 N.Y.S. 2d 309 (4th Dept. 2012)].
First item to consider is the concept that failure to pay taxes will cause not only the borrower’s title to be lost, but the lender’s mortgage to be extinguished as well. Therefore, lenders and servicers need to keep a very careful watch on the payment of real estate taxes which are, after all, always senior to any mortgage. In turn, this means that a service will be employed to follow the payment of taxes, or it is something reviewed in house.
For whatever reason, from time to time, staff or outside servicers may miss the actuality that the taxes have not been paid. This then creates jeopardy to the mortgage. As a matter of law, however, taxing authorities are required to give notice to any mortgage holder that there has been a default and that a tax lien is being sold or later that the tax lien is being foreclosed or that the title is being taken.
A short version of a more intertwined subject is that the notice can be given by mail. The address of the mortgage holder is determined by a review of the public records. So, when a mortgage is recorded, the address in that mortgage is the address to which the notice of some tax default will be sent. This then requires vigilance on the part of mortgage lenders to follow mail to old addresses if they have changed offices over the years.
Then too, it suggests the need for certain documents to actually have been recorded. Thus, if a mortgage is assigned, unless the assignment is of record, when there is a tax default, notice will go to the lender of record, but not to the assignee because the latter is unknown to the taxing authority.
This then leads to the conclusion that no notice need be given to an assignee of a mortgage prior to initiating a tax enforcement proceeding if there is no public record of that assignee’s interest.
But then there is the situation of the new case which is a bit of a twist on this formula. There, a lender had its mortgage on record and a tax proceeding was begun, but without notice to that lender. [The lender, having an interest in the property was indeed entitled to notice as a matter of law pursuant to RPTL §1125(1)(a)(i) and the leading case on the subject in the United States Supreme Court, Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798-800, 103 S.C.T. 2706, 77L Ed. 2d 180].
After the tax proceeding was begun, the lender assigned the mortgage to a bank. When the tax proceeding was concluded and the property was taken back by the municipality and then sold to a third party, the bank – now the holder of the mortgage as assignee – sued to overturn the entire proceeding on the ground that no notice had been afforded it. All the other parties argued that because the bank had no record interest at the time the tax proceeding was begun, it wasn’t entitled to any notice.
The court held, correctly, that the bank was not entitled to personal notice of the tax foreclosure proceeding because it did not have a protected interest in the property as of the date the tax proceeding was begun. (Considerable case law was cited for that proposition). However, the original lender was entitled to such notice because it did have a protected interest in the property. No notice having been given to the lender, it would have had grounds to set aside the tax foreclosure judgment and the tax sale (citing numerous cases). As an assignee of the plaintiff, the bank was empowered to assert lack of notice to its assignee as a ground for setting aside the tax sale. (The principle was that an assignee steps into the shoes of its assignor and may pursue the same remedies as would have been available to its assignor.)
So in this perhaps odd circumstance, the assignee was saved and was victorious. This does not, though, change the imperative for a mortgage holder to promptly record its mortgage and for an assignee of the mortgage to likewise promptly record its assignment – all to put public authorities on notice as to the interest in the mortgage.
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.