New York has an election of remedies statute, or as it is called elsewhere, a “one action rule”. That means generally (although the concepts are widely misunderstood both by litigants and the courts) that a lender must choose either to foreclosure the mortgage or sue on the note, but cannot (generally) do both at the same time.
This ought not be a common issue because lenders overwhelmingly (and understandably) elect to foreclose the mortgage – the security is there and there could be questions about what the obligor (the mortgagors and guarantors, if any) have and whether their assets are even reachable. But there are circumstances where lenders need to make choices and the arena is a potential minefield for mortgage holders, emphasized by a recent case where a lender’s assignee was barred from suing on a note after expensive litigation and an appeal. [Dyck – O’Neal, Inc. v. Thomson, 56 A.D. 3d 1262, 868 N.Y.S. 2d 838 (4th Dept. 2008).]
Here is one of the convoluted rules (which readers should know) that tripped up the lender’s assignee: during a foreclosure action or after final judgment for the plaintiff, no other action can be begun to collect the mortgage debt without leave of the court. Case law supports such leave for “special circumstances” which leads to a review too lengthy for this discussion. But the basic point should be apparent. If a lender starts a foreclosure, but eventually concludes that the smart path would be to pursue the monetary obligation (the note), then either the foreclosure must be discontinued or permission of the court sought.
In the new case, a foreclosure was begun in 2000. The foreclosing plaintiff assigned the mortgage, which was further assigned to the plaintiff here. By 2006 the new holder of the note and mortgage, for whatever reason ignoring the foreclosure action started in 2000, began an action on the note. But no leave of court was asked. Nor could special circumstances be demonstrated, nor was there an explanation offered for years of delay in starting the suit on the note.
All this ran afoul of the election of remedies statute in New York and so the action on the note was dismissed after expenditure of much time and expense.
The lesson? Suing on the note can be a wise and efficient path under some circumstances (as we have reviewed in our alerts over the years). But if that will be the choice, review the file with care to determine if any other actions may have existed and review with counsel the thorny election of remedies ramifications.
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.