Lender priority upheld in condo foreclosures

Real Estate Weekly, June 16, 1993 by Lois Weiss

The New York State Court of Appeals has upheld lenders first lien priority in the proceeds of a foreclosure sale, effectively leaving condos without much recourse to collect all past due common charge payments.

The six-judge unanimous ruling upheld the order of the. Appellate Division interpreting a Section of the real property law. Under the ruling., in Bankers Trust Company/Pal vs. Park 900 Condominium, lenders do not have to pay condominium common charges in arrears out of money received at a foreclosure auction if the monies collected do not fully cover the lenders interest. Condos would receive monies over the mortgage but in this market, most units are sold at auction for less. "It was a tough case," said Gary M. Rosenberg, attorney for the defendant Park 900 condo. "It will put a number of condos where you have sponsor defaults in extreme difficulty."

Rosenberg said lenders have consolidated loans owed by sponsors on other projects with overall loans on viable condominiums as first mortgages. In this way, a loan that might have started as $10 million on 20 condominiums is now $40 million.

"The condo can't foreclose because who is going to buy subject to a $40 million mortgage?," he said.

In this case, Bankers Trust had other loans with the defendant and subsequenfly took over a Citibank loan for $800,000 on the unit, increasing the overall total to $2.7 million.

He predicts banks are now going to do to condos what they are doing to coops with other mortgages. Condo owners will now have to worry about everybody's default, he explained.

"You were not at all dependent on anybody else's economics," he explained. "Suddenly, the whole thing is turned around again. There was no focus in the past that this could happen."

Arthur F. Abelman, of counsel to Moses & Singer, which represented Bankers Trust Company in this case, worked with attorney Joel David Sharrow in writing the brief and on other aspects of the case. Abelman said the decision will continue the interest in banks of making loans to owners of condos. He believes a decision the other way would discourage such loans. "Banks are secured 100 percent so why would banks not loan?," he asked.

He said the condos will just have to aa faster in foreclosing their liens with respect to past due common charges because they could be cut off otherwise.

"We're very pleased with the results," Abelman said. This case clarities the law since there was a small line of cases going the other way. "Now it is crystal clear," he said. Rosenberg said condos will be affected in sponsor situations because they have rented out the units. "R's not going to happen when the owner is living there," he added.

David L. Berkey, partner in Gallet Dreyer & Berkey, said banks are now permitted to bring foreclosure proceedings and not pay condominium common charges while proceedings are underway.

"A condominium which otherwise would look to its unit owner no longer has a means of collection," he said. "If there is no surplus after the auction, the condo is stuck. It means that the condo has to commence its own proceeding immediately and race to obtain whatever equity exists."

Betkey said the decision was expected by the legal community because of the enormous interest by lenders.

Nancy A. Connery a partner with Schoeman Marsh & Updike, who is chair of the committee on co-op and condominium law of the Association of the Bar of the City of New York, said the real problem is that the foreclosure takes so long. "You can have enormous charges run up in the one to five years it takes to foreclose and the condo has a serious problem during that time."

Abelman advised there is no necessity under the present law for lenders to act faster in foreclosing their mortgages. "Banks will act rapidly under the period of prudence," he added.

One solution from the condo association's point of view, Connery said, would be to amend section 339-Z of the Real Property Law to give the condo association some priority even if it is a limited priority.

Sen. Frank Padavan of Queens has introduced a measure that would give condominiums a lien of six months out of such proceeds before the bank could take its share.

His counsel, Charles Assini, said the condominium would not need to be proactive to obtain its money. "Once the foreclosure action is brought, the condo an put in its lien for the first six months of the common charges," he said.

A similar measure passed the State Assembly on April 26 and Padavan's bill has been reported out of the Judiciary Committee and is in Rules.

While six months of common charges may not cover what the condo is owed, particularly if the lender takes a long time to foreclose, Assini explained, "The reality is that we can't get it any longer."

Rosenberg said Padavan's bill is "absolutely critical."