Mortgage servicers don’t necessarily need to know every obscure aspect of the foreclosure process in New York, although both their lawyers and title company counsel do. But when potential problems arise, it can be helpful to know why it happened and what to do about it in the future. In this regard, a new case highlights the relationship of process service to a successful (or unsuccessful) foreclosure sale [Argent Mtge. Co., v Leveau, 46 A.D.3d 727, 848 N.Y.S.2d 691 (2d Dept. 2007)]
To understand the point, let’s briefly review process service, then the quality of title which passes through a foreclosure sale. This then confirms what a mortgage servicer’s terms of sale at a foreclosure need to recite.
First, process service. Regular readers of these alerts (certainly those who have seen them for years) may recall our often expressed point that the early foreclosure stage of process service is one of the real minefields, fertile ground for mischief and delay. Defaulting borrowers in particular (and so many other defendants as well) are rarely reposing at home amenably available to be served with a summons and complaint. Nor do they so readily come to the front at work (where they can also be served) to accept the papers. If they did, they would be served by “in hand” delivery.
Because this happens only some of the time, the foreclosing lender is often obliged to serve a person of suitable age and discretion (at the home or place of business) or if no such persons is available, to affix the process to the door of the dwelling – each of those methods then requiring a mailing as well. (These two latter types of service add considerate time to the case, but that is not our point here.)
As a reward for not being available for in hand service, a special section of the New York practice statue (CPLR ‘317) affords a non-appearing person served with process by either of the two other methods the chance to defend the foreclosure within one year of learning of entry of the foreclosure judgment (but not more that five years thereafter.)
While in many states there is a post-sale right to redeem, that does not apply in New York where the foreclosure sale is really the end of the case. But there is some potential lack of finality to the New York foreclosure whenever a defendant is served other than by in hand delivery because that defendant could theoretically emerge years later to assault the sale claiming he just learned of it and that he as a defense.
Of course, title companies know this, and so whenever they perform a search for the bidder at a foreclosure sale, they raise an exception for the rights any defendant not served by hand delivery may have. If title companies effectively will not give full title insurance for a foreclosed property whenever in hand delivery was lacking, how will so many foreclosure sales ever be consummated?
The answer to the question then depends in part upon the quality of title purchased at a foreclosure sale (and here is where it becomes somewhat obscure and technical) and by what the terms of sale (prepared by lender’s counsel) say the title will be subject to.
A purchaser at a foreclosure sale is entitled to a “marketable” title. That, in turn, is roughly defined as a title free from doubt. But it need not be free of every doubt (as the new case reaffirmed.) In the new case, the bidder contended that certain defendants not served in hand might in the future assert a claim and that this possibility rendered the title unmarketable. Therefore, the bidder asked to be freed from his bid.
“Not allowed” said the court. Something more than a mere assertion of rights is needed to create an unmarketable title. In addition, the court noted that per the terms of sale, the bidder agreed to take the title subject to the rights of any defendants under (the mentioned) CPLR’317.
In short – and this is the key – this lack of in hand delivery will not allow a bidder out for unavailability of title insurance where the terms of sale anticipate and provide the issue (Your terms of sale may already do so. If not they should be changed.
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.