Foreclosure As A Continuing Lender Trap – Notice To Tenants Requirement

Lenders and servicers can sense from their cases how difficult New York foreclosures can be – the plethora of notices and conferences and standards – all of which consume enormous time and confirm that the system is laden with traps which can set the cases back or lead to their dismissal.  How truly byzantine all this is can be difficult to fathom unless one analyzes all the applicable statutes and finds the anomalies and ambiguities, but assuredly the dismay continues.

We comment on some of the problems in our alerts, and a recent case highlights yet another peril for lenders – the tenant notice requirement at the inception of the case.  [650 Brooklyn LLC v. Hunte, 47 Misc.3d 885, 3 N.Y.S.3d 909 (Sup. Ct. 2015).]

Should a foreclosing party be obligated to serve a notice upon tenants at any residential property (not just the home loan case) to advise them of various rights, all as a prerequisite to the privilege of foreclosing? RPAPL §1303 says yes.

Should this requirement apply even if the tenant is not a party defendant in the action?  We do not believe the statute says that, but the cited case does.  And for want of serving the notice on some tenants, the entire foreclosure action was dismissed!

That the borrower was clearly in default was of no consequence.  That the borrower was served with requisite notice per the cited section was also irrelevant to the result.  But lack of notice upon tenants not even in the case was enough to banish the foreclosing plaintiff to suffer the time and expense and the burden of starting the case all over again.

How does this happen?

There is more to it than will be recited here, and we do not assail the court decision as irrational, although we respectfully disagree with it.  The short version of the statute [1303(4)] requires that notice to tenants be delivered within ten days of the service of the summons and complaint.  This strongly suggests that the drafters assumed that tenants would be served with process and they measured service of the additional notice from the time the tenant was served with the pleadings.  This is concededly ambiguous, although that fault lies with the drafters.

The fact of course is that tenants need not be named as foreclosure defendants.  They might be, but they do not have to be.  Why a foreclosing party may or may not elect to serve tenants is a different subject (and rent protected tenants are never served because they are immune to the foreclosure).

Did the legislature realize that tenants might not be served in a foreclosure, thereby drawing no distinction between service of process and service of the tenant notice?  We think not.

This is obscure stuff known mostly to foreclosure specialists, and not even all of them.  The statute was written by staff to a state senator.  Your writer specifically asked the then Governor’s counsel whether any of these staff attorneys had ever prosecuted a foreclosure.  He advised that they had not.

We conclude, therefore, that the statute did not intend that a special notice need be given to a tenant not a party to the action.  But a trial court has ruled otherwise (concededly with careful reasons given) and while the issue has not been addressed by an appeals court, it will likely be the standard for the moment.  Foreclosing lenders will be obliged to serve a special notice on all tenants – even if not a part of the action.  And the penalty for failing to adhere – the mentioned trap: dismissal of the action.

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.