A new case – meaningfully at the Appellate Term level – clearly reaffirms a vital principle relating to the right of possession after a foreclosure sale [BH 2628 LLC v. Zully’s Bubbles Laundromat, Inc., 57 Misc.3d 63, 61 N.Y.S. 3D 809 (App. Term 2017)].
In this case, the trial court got it wrong and it engendered the time and expense of an appeal to vindicate the foreclosure sale purchaser. This happened too in a recent unreported case (the trial court reversed itself, though) suggesting a too prevalent misconception – that a tenant not named in the action cannot be evicted.
How truly important this is readily appears upon reciting a typical scenario. Assuming foreclosure of a one family house, the action is initiated by the filing of a summons and complaint and, almost invariably, a lis pendens as well. At the beginning the borrower resides at the premises. If he holds over after the foreclosure sale, he can be evicted – hardly an uncommon situation. [For attorney readers, this is pursuant either to RPAPL §713(5) or RPAPL §221, the difference alone easily the subject of an extensive article; for the moment see 4 Bergman on New York Mortgage Foreclosures Chap. 33, LexisNexis Matthew Bender (rev. 2018)].
Suppose, though, that at some moment after the foreclosure is begun, the borrower leases the house to a tenant. That tenant was unknown to the foreclosing lender and of course was never named or served in the action. If the tenant is a stranger to the action (the mistake that some lower courts have made) it might appear that he is not subject to eviction. That would mean that the third party who bid in at the foreclosure sale, or the foreclosing lender if it was the bidder, is stuck with that tenant because the foreclosure judgment does not bind the tenant. Not so.
The controlling maxim is that once the notice of pendency is filed in an action, anyone obtaining a subsequent interest is bound to the foreclosure proceeding as if he had been made a party. This is a matter of both statute (CPLR § 6501) and extensive case law [See citation at 1 Bergman on New York Mortgage Foreclosures §15.02, Lexis Nexis Matthew Bender (rev. 2017)]. As a secondary, but fully related effect which flows from the primary effect of a lis pendens is the rule that any purchaser or encumbrancer subsequent to the filing of the lis pendens is cut off by foreclosure decree.
All this makes sense as a practical matter too. Once a foreclosure is begun, if the lis pendens typically filed at the inception would not have the effect of cutting off subsequent interests and binding everyone with a later interest to the action, a defaulting borrower-owner could, days, weeks or months after the foreclosure was initiated, simply convey it to a friend or cousin – or a brother. If that new owner was not bound by the action, then the foreclosure would yield no title at the foreclosure sale.
To avoid that untenable result, a foreclosing Plaintiff would be constrained to perform new searches periodically. Whether daily, weekly or monthly, one of those would ultimately reveal the new owner (or other new encumbrancer or tenant with a recorded lease) thus requiring the foreclosing party to move to amend the complaint to and the new interest holder as a party defendant. When some months later, the motion to amend might be granted, service of process would first have to ensue upon the new party. Even assuming the new party did not interpose an answer, the plaintiff might be forced to repeat whatever steps had previously been accomplished in the case, such as the appointment of the referee or the referee’s computation or the judgment of foreclosure and sale. In any event, even when the new party is finally disposed of, days, weeks or months later that new party could yet further convey the property and start the impeding process running all over again. In sum, it should be obvious that if the lis pendens did not have the effect that it does, no foreclosure could ever be efficaciously completed. Nor could any later tenant be subject to the action.
So the new case made the point successfully. Because the occupant’s lease “was signed several months after a notice of pendency had been filed in…the foreclosure action, occupant was, contrary to the (lower court’s) holding, bound by the judgment of foreclosure…and the lease was voidable by petitioner following its purchase in foreclosure” (citations omitted).
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2018), 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.