This is scary – really scary. A new case says a lender may be liable in damages to the family of a deceased mother and child who died in a fire at the mortgaged premises. [Lezama v. Cedano, 119 A.D.3d 479, 991 N.Y.S.2d 32 (1st Dept. 2014).] Understand that the lender did not own the property. The borrower still owned it and was sued as well, but the court found that the lender could not demonstrate that the property had not been abandoned by the owner of the borrower. Why that mattered is a point of this alert.
First, this situation should not be confused with what can happen after a foreclosure sale. If a lender buys back the property, until it completes an eviction and obtains legal title, it has no care, custody and control over the property. Without that requisite care, custody and control, it cannot be liable for negligent acts; it was not in a position to maintain the property so if lack of maintenance leads to injury it cannot be liable for that reason. There is certainly case law on that concept and we have discussed it previously in alerts. [For a further discussion with case citations, see, 1 Bergman on New York Mortgage Foreclosures, §2.24, LexisNexis (rev. 2014).]
In the new case mentioned, though, the foreclosure had not yet been completed. How then could there be any issue of a lender – not owning the property and not in control of the property – being liable for injuries through negligence? The answer lies in the unfortunate mandate of RPAPL §1307 entitled “Duty to Maintain Foreclosed Property”. This was part of a comprehensive 2009 statute regarding foreclosures which provided extensive perceived protections to borrowers and we railed in particular at the time against this provision for just the reason that this startling case confirms.
RPAPL §1307(1) provides in essence that when a plaintiff in a mortgage foreclosure action obtains the judgment of foreclosure and sale for residential real property, and if the property is vacant or becomes vacant after issuance of the judgment, or is abandoned by the mortgagor but still occupied by a tenant, the lender is required to maintain the property until ownership is transferred through the closing after a foreclosure sale.
It was immediately apparent upon reading the statute that a lender proceeding through a foreclosure would now be required to determine whether all of its foreclosed properties (after judgment) were vacant or abandoned – not at all easy to do. It can be uncertain. But if there was an abandonment or if it had been vacated, then there was this maintenance responsibility which could expose the lender to a negligence claim for a period of unknown duration. That is just what happened in the cited case.
There, the lender argued that the property had not been abandoned and that it had documentary evidence to demonstrate that. Accordingly, it made a motion to dismiss the complaint in the negligence action on the ground that the complaint did not state a cause of action. But the court found that the lender failed to adequately prove that the premises were not abandoned. That being so, the complaint was allowed to stand and the case had to proceed.
What will happen in the end is unknown. It is still possible that the lender may be able to show that the property was not abandoned, in which event the maintenance obligation never applied. If it does not, though, it may very well be liable for enormous sums for the loss of life.
Of course, none of this is to suggest that the events were not tragic; to be sure, they were. But that a lender who does not own property should be a party liable is a concept invented by a legislature which may not have realized the chilling effect such a statute could have upon mortgage lending in New York. It creates a danger that lenders could never plan for. And whether there was even insurance here to protect the lender is problematic – and indeed is doubtful.
So in the end, this is yet another peril to lenders that they must in some fashion account for here in the Empire State.
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.