Consolidated First Mortgage vs. Condo Lien: New Definitive Cases


1 July, 2015


Mortgage Lender and Servicer Alerts

The relationship between a first mortgage and a condo lien is critical to mortgage lenders, to condominiums and to title companies, as will be explained.  The question has arisen, though, as to what exactly is a “first” mortgage.  Welcome resolution of that issue (although we say it never should have been an issue) is the source of this alert.

If a lender takes a first mortgage on a condominium unit, then takes a second mortgage on the same unit, then consolidates the two to form a single lien – all quite common – is it a first mortgage?  Logic and practice both say that it is, but why is the question even being asked?

The answer is that the priority relationship between a condominium common charge lien and a mortgage depends upon whether the mortgage is a first mortgage or has a more junior standing – and the reason it matters is that a special statute in New York (RPL §339-z) changes the common law (first in time first in right) and elevates a condominium common charge lien to superiority over (for our purposes) almost everything except a first mortgage.

In turn, this essentially means that when a first mortgage on a condo goes into foreclosure, a condo lien is inferior and will be extinguished by the foreclosure sale.  But foreclosure of a second (or more junior) mortgage will not cut off a condo lien and cannot properly name the condo board as a defendant in the foreclosure action.

From the reverse viewpoint – that of the condo foreclosing its common charge lien – it cannot name or cut off a first mortgage, but rather must sell subject to that lien.  But the condo can name and do away with the lien of a second (or more junior) mortgage attaching to the condo unit.

While all this seems straightforward enough, there is remarkable nuance to the statute and to creative circumstances.  This has engendered considerable litigation, with a main principle having required disposition in New York’s highest court, the Court of Appeals.  [For those readers who may benefit from the full story, see Bergman on New York Mortgage Foreclosures, §36.02, LexisNexis Matthew Bender (rev. 2015.)]

It is therefore critical to both mortgage holders and condo boards to recognize when a first mortgage burdens a condo unit.  Recalling the construct of a consolidated mortgage, it occurred to a condo board in 1993 to try the argument that as to its condo lien, what had been a second mortgage, although consolidated with a first mortgage, remained a second mortgage so that such portion was inferior to the condo lien.  While real estate lawyers and title companies immediately recognized such a view as baseless, the problem was that the first court to address the issue ruled for the condo.

Such a ruling was very dangerous for lenders (who might suffer loss of priority to a later condo lien for any second mortgage consolidated with a first), to condo unit owners who might find it more difficult to obtain further financing (in the form of a second mortgage consolidated with a first mortgage) and to title companies which insured the priority of a consolidated mortgage.

The errant decision turned the real world upside down.  When later, however, the point was argued again, courts repeatedly rejected that first decision.  But all these were at the trial court (Supreme Court) level, without benefit of a definitive ruling from an appeals court – the Appellate Division.

That problem has now been remedied.  In Plotch v. US National Bank Association, 2015 WL 3604574 (2nd Dept.) (citing among others Plotch v. Citibank, N.A., 120 A.D.3d at 1211) the court ruled that because the condo statute (RPL §339-z) is in derogation of the common law, the statutory right to priority must be strictly construed – thus the once second mortgage consolidated with a first mortgage is a first mortgage and superior to a later condo common charge lien.

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.