Federal judge vacates Freddie Mac foreclosure sale

Real Estate Weekly, Feb 10, 1993 by Robert M. Trien

In a case of first impression, Judge Gerard L. Goettel, of the United States District Court, Southern District of New York, issued a sixteen-page opinion, dated Dec. 28,1992, in the case of Federal Home Loan Mortgage Corp. vs. Dutch Lane Associates, et al., in which he vacated a foreclosure sale held pursuant to a judgment obtained by the Federal Home Loan Mortgage Corporation ("Freddie Mac") because of Freddie Mac's failure to have served a notice of the sale upon the attorney for the mortgagor who had appeared in the action.

Freddie Mac contended that it was sufficient to have published a notice of sale in the New York Law Journal once a week for four weeks, pursuant to applicable Federal statutes, and that the New York case law which requires that such notice be personally served upon parties who have appeared in the foreclosure proceeding, has no application to mortgage foreclosure actions brought in federal courts by Freddie Mac on federally insured loans. The court disagreed with Freddie Mac, holding that the Federal statutory requirement of notice by publication was not intended to preempt or displace New York's requirement that personal service be made upon parties with substantial interests in the real property who have appeared in the foreclosure action and have not expressly waived notice of sale. The court stated that applying New York's personal notice requirement causes no interference with the federal notice scheme and comports with fundamental constitutional notions of due process by insuring that persons with property interests receive notice of the date, time and place of the sale of their property. The court further stated that the New York personal notice requirement, rather than posing an obstacle to accomplishing federal objectives, enhances and helps implement the federal goal of ensuring that parties with significant interests in property are informed when their property will be sold.

It has become a common practice for owners of distressed properties to file petitions pursuant to Chapter 11 of the Bankruptcy Code just prior to the holding of foreclosure sales. Such filings have the effect of staying the sales and enable debtors to present plans to reorganize or restructure their debt. Had the court adopted the position urged by Freddie Mac, this practice of last minute filings would no longer be available with respect to mortgages which become the subject of federal court foreclosure actions.

In the Dutch Lane case, the owners of the mortgaged property had intended to file a bankruptcy petition prior to the foreclosure sale, and expected to receive notice of when the sale was to take place. They argued that Freddie Mac's attorney intentionally refrained from sending them a notice of the sale so as to unfairly deprive them of the right to file a bankruptcy petition prior to the sale, and that it was unseemly for Freddie Mac's attorney to cause a foreclosure sale to occur behind their backs, particularly after the owners had vigorously defended the foreclosure proceeding. The court concluded that "Given that he has presumably served every other paper on defendants' counsel, we can see no reason why plaintiffs counsel should have chosen not to serve defendants' counsel with a notice of sale, even if only as a matter of courtesy."

Judge Goettel, however, did not deal with the question of how much notice must be given. As the court pointed out, both New York state and federal statutory law contain only notice by publication requirements. While the New York state courts have held that even in the absence of any specific statutory requirement, personal notice must be given, the New York courts have not said how much notice need be given. Likewise, while Judge Goettel, in Dutch Lane, has held that personal notice of the foreclosure sale must be given by Freddie Mac to mortgagors, he, too, did not specify how much notice would be sufficient.

Unless both the New York State legislature and the U.S. Congress focus on the notice issue, owners of properties, which are the subject of foreclosure actions, will be left uncertain as to how much notice they will get of the date, time and place of foreclosure sales. They should therefore be prepared, on short notice, to either exercise their right of redemption, to file a bankruptcy proceeding, or to take other steps to protect their interests.