Judgment Rate Reduction – Why And How It Matters

The amendment to CPLR § 5004 reducing the judgment rate of interest from 9% to 2% (for consumer debt judgments but not foreclosure judgments) was the subject of our recent alert, a more detailed analysis appearing in The New York Law Journal on April 13, 2022.

Although we are comfortable with the legal position that the revised statute cannot apply to judgments of foreclosure and sale, we surmise that some borrowers may take a contrary stance, moreover that the Office of Court Administration might join in such an interpretation.  This portends time consuming, expensive and (in our view of course) baseless litigation.  Misinterpretation of the statute is therefore most unwelcome.  Why and how that is so is the subject of this review.

 The Upset Price

The first time the rate of interest applying to the judgment of foreclosure and sale is addressed is when the plaintiff computes its upset price for the impending foreclosure sale.  The interest on the judgment from the day it was signed is obviously a factor in the sum due.

Whenever the sale may be conducted, should the plaintiff bid the full sum due and become the successful bidder, borrowers (and others) might readily argue that the bid is inflated by charging interest on the judgment at an excessive rate, thereby creating a surplus for others to claim against.  Obviously this discussion does not endorse such a stratagem, but rather dismayingly perceives a possible path for the new statute to encourage.

The next occasion this aspect plays a role is when the referee is bound to submit a surplus monies statement after the sale.  While the source of that is the plaintiff’s upset price and the relationship of that to the proceeds of the sale, the numbers will reflect the judgment interest rate.  If a foreclosing plaintiff errs and assumes that the rate is 2%, then the formula is changed.  If it adheres to the correct 9%, then the possibility of protest looms.

Finally, the filing of the referee’s report of sale is the primary source of all subsequent events – surplus or deficiency.

 Delay in Sale

If a sale is conducted but a few months after entry of the judgment, the interest component may not be that meaningful.  However, delays, and lengthy ones at that, are commonplace in the foreclosure process.  Borrower bankruptcy filings, orders to show case with stays, stays upon appeal, among other events, can readily delay the sale for considerable periods of time.  Related to that is situation where a sale is conducted but the bidder raises title issues which delay a closing still further.  With interest accruing during that hiatus pursuant to the terms of sale, the difference between 2% and 9% is magnified.

Then, of course, the larger the judgment, the greater the function interest accruing on the judgment will be.  It is apparent that the interest on a modest residential sale of $300,000.00 is quite different from that upon a $10,000,000.00 mansion. (Recall that commercial mortgages are indisputably not affected by the new statute.)

 Deficiencies and Surplus

The computation of the sum due upon the mortgage pursuant to the judgment, inclusive of course of the interest rate that judgment yields, is then the basis for computing a resultant surplus or deficiency, as the case may be.  The greater the sum due to the foreclosing plaintiff, for which interest on the judgment is a factor, the more likely surplus available will be reduced.  (Value of the property is always an element.)

The opposite equation arises when computing a deficiency.  The greater the sum due to the foreclosing plaintiff, in relation to the value of the property, the larger will be the deficiency.

 Conclusion

In sum, all the math, all the monetary relationships that arise out of a foreclosure sale are based upon the sum due.  Interest on the judgment, depending upon the circumstances, may either be a modest, or a significant portion of the calculation.

As mentioned, if some foreclosing attorneys (incorrectly) assume that the judgment rate on the foreclosure judgment is 2%, the return to the foreclosing party will be artificially reduced.  Concomitantly, computation of any surplus or deficiency will be askew.

If foreclosing plaintiffs properly elect to compute the rate of 9%, court clerks might intervene to reduce that sum.  That concern aside, any party affected by the computation, for example the former property owner or any junior lienor, might seek to challenge the calculation in a surplus money proceeding or upon a deficiency judgment motion.

Having to repeatedly litigate that equation would be most unfortunate in the foreclosure arena given that there should be no confusion as to the applicable rate of interest.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2022), 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.