Real Estate

Right to Surplus Moneys

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In certain cases, the Referee in the foreclosure action conducted a sale of the subject real property generates surplus moneys after an auction sale, which are then deposited with the court. After filing of the Referee’s Oath and Report of Sale after foreclosure auction sale, a party can move for confirmation of the Report of Sale more than 3 months but not later than 4 months after the filing of the Report of Sale. RPAPL §1355. Further, upon confirmation of the Report of Sale, and on motion of any party prior to or within 3 months of confirmation of the Report and Sale claiming the surplus moneys which have arisen from the foreclosure auction sale, the Supreme Court shall determine the priorities in such surplus moneys and order distributions thereof. RPAPL §1361.

The Second Department has held that the failure to move to appoint a Referee in a Surplus Money Proceeding following foreclosure of a mortgage within the time prescribed by statute is a mere irregularity which, in the absence of prejudice of any substantial right of a party, may be disregarded. Associated Financial Services, Inc. v. Davis, 183 AD2d 686, 583 NYS2d 274 (2d Dept. 1992).

The potential issue of a defendant or claimant not having filed an Answer or Notice of Appearance in the foreclosure action is not relevant as to whether that party may pursue recovery of surplus moneys. It is well settled that a defendant who defaulted in answering the foreclosure action is not precluded from proving its lien in Surplus Money Proceeding. Riverhead Savings Bank v. Garone 183 AD2d 760, 583 NYS2d 483 (2d Dept. 1992), citing to The Dime Savings Bank of Brooklyn v. Pine Drive Associates, Inc., 28 Misc.2d 648, 212 NYS2d 111 (Sup. Ct., Nassau Co. 1961). Further, a second mortgagee/lienor, as a party named in the foreclosure action, is not required to file a Notice of Claim to Surplus Moneys in order to preserve its right to satisfaction of its lien from surplus proceeds of a foreclosure sale. Federal Home Loan Mortgage Corp. v. Grant, 224 AD2d 656, 639 NYS2d 72 (2d Dept. 1996) (“As a party to the foreclosure action, the respondent, secondary mortgagee Marine Midland Bank, was not required to file a notice of claim to the surplus moneys in order to preserve its right to the satisfaction of its lien from the surplus proceeds of the foreclosure sale.”).

Where, under a mortgage foreclosure sale, a surplus is realized, and the premises are at the time of such sale subject to a second mortgage, the respective rights of the parties will be determined as of the date of the foreclosure sale. Elsworth v. Woolsey, 19 AD 385, 46 NYS 486 (1st Dept. 1897), affirmed, 154 NY 748, 49 NE 1096 (1897). New York courts have held that those respective rights in the surplus moneys, as enunciated by Elsworth, transfer from the “res” of the action, to wit: the land, to the surplus moneys. In Roosevelt Savings Bank v. Goldberg, 118 Misc.2d 220, 459 NYS2d 988 (Sup. Ct., Nassau Co. 1983), the court held:

“Surplus money realized upon a foreclosure sale is not a general asset of the owner of the equity of redemption, but stands in the place of the land for all purposes of distribution among persons having vested interests or liens upon the land. Surplus money takes the place of the equity of redemption, and only one who had a vested estate or interest in the land sold under foreclosure which was cut off by the foreclosure sale, is entitled to share in the surplus money, with priority in each creditor determined by the filing date of his lien or judgment.”

R. A. Klass
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Saved from the Auction Block

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A Kings County homeowner was unable to pay his mortgage. He had been in and out of bankruptcy and his Midwood-area house had been in foreclosure since 2007. A Judgment of Foreclosure and Sale had been entered in 2010. Now, the foreclosure auction was scheduled for September 13th. In laymen’s parlance, the auction sale date is the “drop dead” date for the homeowner to keep his house and, in the final days before the auction, the homeowner needed Richard A. Klass, Your Court Street Lawyer, to save the house from the auction block.

What is a Foreclosure Auction Sale

When there is a lien against real estate in New York, the plaintiff-lienor (usually a mortgage lender) can bring a foreclosure proceeding to foreclose that lien against the property in order to have the debt paid. This includes actions to foreclose a mortgage, mechanic’s lien for labor rendered or goods delivered by a contractor, a condominium building’s common charges, or homeowners’ association fees. The culmination of a foreclosure proceeding is the auction sale of the property to the highest bidder.

Once the hammer of the court-appointed referee drops, the homeowner’s right to redeem the property is gone! Then, it’s time for the homeowner to plan to move from the house or be ejected by the successful bidder. In this case, this homeowner needed to stop the auction sale — stop the drop of the hammer.

Old Foreclosure Cases

Recently, the foreclosure process in various counties has ground to an almost-halt, where foreclosure proceedings have been litigated in the courts in excess of three or four years (or even longer!). Depending on the perspective of the plaintiff-lienor or the defendant-homeowner, this is either a good or bad consequence of the slow process.

As a result of several factors, including the slower foreclosure process, bankruptcy, motions to vacate default judgments and requests for loan modification, the actual foreclosure auction sale date could wind up being many months or even years after the Judgment of Foreclosure and Sale has been entered by the court. Eventually, concern may arise about holding an auction sale so long after the Judgment has been entered. While the amount indicated in the Judgment may have been $100,000 at the time of the auction, the amount due to the plaintiff with accrued interest, property taxes, etc., may become $150,000.

In the Supreme Court decision of Bardi v. Morgan, 17 Misc.3d 927, 847 NYS2d 431 [Sup.Ct., Kings Co. 2007], Justice Kramer noted that a crucial component of the foreclosure process — which is often conducted on the default of the homeowner who never answered the Summons — is the referee’s accounting of the amounts due to the mortgage lender — which is done pre-judgment, providing a detailed snapshot of the mortgage debt. This accounting, done by an impartial appointee of the court, ensures the reliability and fairness of the foreclosure proceeding. This serves the function of accurately advising the court of the costs and disbursements expended during the process, thus enabling the court to determine whether the charges were taken in accordance with the law and ensure that there has been no overreaching by the plaintiff. An accurate, impartial and transparent accounting becomes particularly important when the purchaser is not a third party but is the foreclosing mortgage holder and the potential for self-dealing arises. In Bardi v. Morgan, the judge held as follows: “Accordingly, this Court holds that in any case where an auction sale has been scheduled more than one year after the entry of the judgment of foreclosure and sale, the Notice of Sale is invalid and the Clerk of this Court is directed to reject it, unless an amended and updated reference and a supplementary foreclosure judgment reflecting the corrected amount is provided.”

The Supreme Court for Kings County followed suit and enacted Rule 13 of Part F of the General Foreclosure Rules, which provides as follows: “Notices of Sale may be filed with the Clerk within one year of the entry of the Judgment of Foreclosure and Sale. Permission of the Court must be obtained for any filings made thereafter.”

Upset Price vs. Judgment Amount

The reasons this rule is so important become evident when considering the above example (Judgment is $100,000 but amount due with accrued interest is $150,000), including: (1) The homeowner may be relying upon the judgment amount in order to attempt to raise the money necessary, right before the auction sale, to satisfy the judgment; (2) The homeowner may need to know the amount due if he elects to file a bankruptcy case for estimation purposes; and (3) Prospective bidders would be interested so they know how much money to bring to the auction to bid on the property. At the auction sale, if the lender calls out a much higher “upset” price than the judgment amount, everyone except the lender will be surprised; it would be unfair for the lender to have so much control over the bidding process.

In our case here, upon presentment of the Order to Show Cause to stop the auction sale — because the lender proposed selling the house without having gotten permission from the Supreme Court — the lender retreated and agreed to cancel the sale. Now, the lender will have to go through the steps of obtaining an amended referee’s report of the amount due, along with the request from the court of issuance of a supplementary judgment. These steps will add several months to the process.

by Richard A. Klass, Esq.

copyr. 2012 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

Painting at top: The Captain’s Auction (by 1875), John Ritchie (fl. 1858-1875). This work is in the public domain in the United States because it was published (or registered with the U.S. Copyright Office) before January 1, 1923 and its copyright has expired.

R. A. Klass
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Ownership of Property among Two Sets of Spouses

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“Rodriguez’s Right to 50% of the Property Was Created by Operation of Law”

In this case, the Deed to the subject real property indicated ownership of the property as follows:

“GILBERTO HERNANDEZ and CONSOLACION HERNANDEZ, HIS WIFE … AND ERLINDA QUE and ELPIDIO RODRIGUEZ, HER HUSBAND.”

As to the 50% interest in the property owned by movant  Elpidio Rodriguez and his wife, Erlinda Que, they owned their share as tenants by the entirety. Based upon the substantial case law in New York State, Mr. Rodriguez and Erlinda Que took ownership of their half-share as husband and wife, have continued as such until Erlinda Que’s death.

In Prario v. Novo, 168 Misc.2d 610 (Sup. Ct., Westchester Co. 1996), the court held that a grant of real property to a husband and wife creates a tenancy by the entirety “unless expressly declared to be a joint tenancy or tenancy in common.”  Estates, Powers and Trusts Law § 6-2.2(b). A joint tenancy is subject to partition during the lifetimes of the joint tenants (24 N.Y.Jur.2d, Cotenancy and Partition, § 33; 3A Warren’s Weed, New York Real Property, Partition, § 3.03; id., vol. 2A, Joint Tenants, § 4.01) whereas a tenancy by the entirety cannot be divided absent consent of both spouses or upon a divorce (24 N.Y.Jur.2d, Cotenancy and Partition, §§ 38, 56; 3A Warren’s Weed, op. cit., Partition, § 3.12) The tenancy by the entirety can be changed by voluntary act of the couple, divorce or death.

In Goldman v. Goldman, 95 NY2d 120 (2000), the Court of Appeals noted that a tenancy by the entirety is a form of real property ownership available only to parties married at the time of the conveyance (Kahn v. Kahn, 43 N.Y.2d 203, 207, 401 N.Y.S.2d 47, 371 N.E.2d 809). As tenants by the entirety, both spouses enjoy an equal right to possession of and profits yielded by the property (Neilitz v. Neilitz, 307 N.Y. 882, 122 N.E.2d 924). Additionally, “each tenant may sell, mortgage or otherwise encumber his or her rights in the property, subject to the continuing rights of the other” (V.R.W., Inc. v. Klein, 68 N.Y.2d 560, 565, 510 N.Y.S.2d 848, 503 N.E.2d 496). Only if the legal relationship between the husband and wife is judicially altered through divorce, annulment or legal separation, does the tenancy by the entirety converts to a tenancy in common (Kahn v. Kahn, 43 N.Y.2d, supra, at 207, 401 N.Y.S.2d 47, 371 N.E.2d 809).

Courts have recognized that a tenancy by the entirety cannot be altered without the mutual consent of the spouses or divorce. In Sciacca v. Sciacca, 185 Misc.2d 105 (Sup. Ct. Queens Co. 2000), the court held that: “As articulated by the Court of Appeals in Kahn v. Kahn, 43 N.Y.2d 203, 401 N.Y.S.2d 47, 371 N.E.2d 809, a court cannot direct the disposition of property held by married couples as tenants by the entirety until the court first alters the marital status, such as by entering a judgment of divorce or separation. Indeed, the law is long-settled that neither entirety tenant may, without the consent of the other, dispose of any part of the property to defeat the right of survivorship.” Citing to Hiles v. Fisher, 144 N.Y. 306, 39 N.E. 337.)

The Court of Appeals held, in Hiles v. Fisher, 144 NY 306 (1895), that the husband had a right to mortgage his interest, which was a right to the use of an undivided half of the estate during the joint lives, and to the fee in case he survived his wife; and by the foreclosure and sale the plaintiff acquired this interest, and became a tenant, in common with the wife, of the premises, subject to her right of survivorship.

Revisiting this issue, in V.R.W., Inc. v. Klein, 68 NY2d 560 (1986), the Court of Appeals held:

What makes this right of survivorship unique and differentiates it from the right of survivorship inherent in an ordinary joint tenancy is that it remains fixed and cannot be destroyed without the consent of both spouses (see, Kahn v. Kahn, 43 N.Y.2d 203, 401 N.Y.S.2d 47, 371 N.E.2d 809; compare, Matter of Polizzo, 308 N.Y. 517, 127 N.E.2d 316; Matter of Suter, 258 N.Y. 104, 179 N.E. 310, with Matter of Klatzl, supra, 216 N.Y. at pp. 86-87, 110 N.E. 181; Hiles v. Fisher, supra). As long as the marriage remains legally intact, both parties continue to be seized of the whole, and the death of one merely results in the defeasance of the deceased spouse’s coextensive interest in the property (see, Stelz v. Shreck, supra, 128 N.Y. at p. 266, 28 N.E. 510; Bertles v. Nunan, supra, at p. 156). Similarly, involuntary partition is not available to either cotenant as a means of severing the tenancy by the entirety, since a contrary rule would permit a vindictive or irresponsible spouse to deprive the other of the comforts of the marital home (see, Kahn v. Kahn, supra, 43 N.Y.2d at p. 208, 401 N.Y.S.2d 47, 371 N.E.2d 809; Anello v. Anello, 22 A.D.2d 694, 253 N.Y.S.2d 759; Vollaro v. Vollaro, 144 App.Div. 242, 129 N.Y.S. 43).

Accordingly, the ownership interests of Mr. Rodriguez and Erlinda Que as “husband and wife” created a tenancy by the entirety. Upon the death of his wife, Mr. Rodriguez became the owner of her share by operation of law; any Last Will and Testament of Erlinda Que would not alter his rights.

Long-established New York law is that real property held as tenants by entirety does not pass under the Will of a decedent spouse. In re Rothko’s Estate, 77 Misc.2d 168 [Sur. Ct., NY Co. 1974]; In re Strong’s Will, 171 Misc. 445 [Sur. Ct., Monroe Co. 1939] (“A severance of a tenancy by the entirety cannot be effected by the unilateral last will of one of the spouses alone.” Citing to Levenson v. Levenson, 229 AD 402 [2 Dept. 1930]).

On the death of the first tenant by the entirety of real property, his estate ceases to have any interest in such property. Matter of Harris’ Estate, 88 Misc.2d 60 [1976], affirmed 61 AD2d 881.

R. A. Klass
Your Court Street Lawyer

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When Do Two Feet Matter? When $16,728,000 Rides on It!

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In 2006, a developer entered into a contract to purchase a large industrial warehouse in Greenpoint, Brooklyn, in order to convert the property into residential housing. The Contract of Sale provided for a purchase price of $16,728,000.
 
The contract was amended and extended eight times in order to provide for several issues to be resolved. Among those issues, there were tenant buy-out agreements concerning the several remaining commercial tenants. During the entire process, the developer was required to make several types of payments to the seller (separate from the large down payment) towards the operating costs of the property. The developer made substantial payments to the seller, including Surrender Agreements, Tenant Buy-Outs, Operating Expenses, and Security Costs. The property finally became completely vacant, and a closing was to be scheduled in 2007.

Title Defects Raised – Especially Chimney Protrusion

As is common in real estate contracts, there was a clause that all title “defects” were to be cured before closing. A title defect is generally defined as an issue relating to ownership or possession of the property, the legal description of the property to be sold or liens affecting the property – or, more to the point, a title defect is one that a reputable title company believes would render title unmarketable. In this case, the survey revealed that a chimney from an adjoining property was protruding two feet into the property to be sold.

The title defect was raised to the seller’s attorney by the developer. In response, the seller’s attorney claimed that the title defect was insignificant and was being raised as a delay tactic and was without merit. To that end, the seller declared a certain date as the “time of the essence” date for the closing. If the developer did not close on that date, then the down payment and all of the operating costs would be deemed forfeited to the seller. Needless to say, that date came and passed, and the seller declared the developer in breach of the contract, entitling the seller to retain the moneys.

Your Court Street Lawyer, Richard A. Klass, was then retained by the developer to ensure that the down payment moneys would not be lost and title would transfer to the buyer under the Contract of Sale.

Quick Action Was Needed

The first step was to file, along with the Summons and Complaint, a Notice of Pendency (also known as a Lis Pendens) against the Block and Lot of the property. This is a statutory creation under New York’s Civil Practice Law and Rules Article 65. This document gives notice to the entire world that there is a dispute which affects the title, use or possession of real property. The filing of this Notice preserves the rights of the buyer from a seller transferring title to the property in contract, as whoever buys the property is deemed to have knowledge of the dispute.

Simultaneously, the Complaint against the seller was filed with the County Clerk’s Office, which contained several allegations against the seller, including that:

  1. the developer fully complied with the Contract of Sale and was entitled to “specific performance” because real estate is considered a “unique” asset that cannot be replicated (the law recognizes that each piece of real estate is distinct);

  2. the electronic communication from the seller’s attorney to the buyer’s attorney concerning the “time of the essence” closing date did not comply with the “notice” provision of the Contract of Sale (it is always important to check the notice provision of any contract to see how notices to the other side are to be sent, e.g. certified mail, overnight delivery, etc.);

  3. the seller failed to actually “tender” the Deed to the property by coming to the place of closing, as required by the contract (the non-breaching party to a real estate contract must show that it showed up at the place and time indicated in the contract to deliver the Deed, even if the other side does not come; thus, recognizing that the breaching party could potentially show up at the last minute to actually close the transaction); and

  4. the title defects rendered title to the property unmarketable and uninsurable; thus, the developer was entitled to the return of all of its down payment and operating costs.

In New York, it is well settled that in order to place a contract vendor (seller) in default for a claimed failure to provide clear title, the purchaser must first tender performance and demand good title. See, Capozzola v. Oxman, 216 AD2d 509. Following that line, a tender of performance by the purchaser is excused only if the title defect is not curable. See, Cohen v. Kranz, 12 NY2d 242. The law also recognizes that a purchaser may opt to waive a title defect concerning the property in order to close title.

The end result of this case was that, despite the claim of the seller that the developer breached the contract and it was entitled to retain all of the moneys paid, the seller agreed to extend the date of closing for an additional month to facilitate the closing of title to the developer.

by Richard A. Klass, Esq.

 

©2008 Richard A. Klass. Art credits: page one, Dorfstraße by Giovanni Fattori, 1903-1904.

copyr. 2011 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Home! Sweet Home!

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The homeowner had a bunch of problems. Not only was he saddled with over $30,000 in credit card debt spread across several credit card accounts, he had also just received the Summons and Complaint, filed by his mortgage lender, seeking to foreclose on the mortgage recorded against his home. He was delinquent on his mortgage and owed many months’ worth of mortgage arrears. This homeowner is one of the tens of thousands of homeowners across the State (and more across the country) who have fallen into foreclosure with little help or support. Fortunately for the homeowner, he came to Richard A. Klass, Your Court Street Lawyer, for help.

Establishing the Best Strategy

In order to establish the best strategy for the particular situation, the house’s fair market value first had to be considered.

Many homeowners have seen their property values drop so low that their houses are “underwater,” meaning they owe more on their mortgage than the house is worth. In such circumstances, there are different strategies which may be taken by homeowners, including offering the lender a deed in lieu of foreclosure or staying in possession of the house for as long as possible until the foreclosure auction sale. In this case, the homeowner was unsure of his house’s fair market value, so he was advised to hire a licensed appraiser for an honest, unbiased opinion as to the value of the house. The appraisal came back and showed that the amount due to the mortgage lender on the outstanding mortgage was nearly equal to the fair market value. The homeowner and his wife liked their home and neighborhood, so he wanted to figure out a way to save the house, if possible.

Defending the Mortgage Foreclosure Case

The foreclosure proceeding brought by the mortgage lender had to be answered. The homeowner answered the Complaint and also brought Counterclaims against the lender, alleging that the lender engaged in predatory lending practices, fraud, and violations of the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Filing the Answer and Counterclaims placed an obstacle in the path of the mortgage lender and helped slow down the foreclosure process.

As another part of slowing down the mortgage lender’s case, discovery demands were served, including a request for copies of all documents signed at the closing, when the mortgage was first obtained. It is crucial to a homeowner’s defense of a mortgage foreclosure case, in a time when affidavits are “robo-signed” by non-bank representatives, original documentation is lost by mortgage departments, and mortgages lack assignment from the original lender, that all documents be reviewed for their authenticity and truthfulness.

A Dollar Can Be Stretched Only So Far!

After establishing that the house was not very much “underwater” and that the homeowner wanted to keep the house, the next step was to consider how to pay the mortgage, property taxes and other carrying charges of the house. The homeowner’s take-home salary could only go so far — he could not afford to make the regular monthly mortgage payment as well as the minimum payments on all the various credit card accounts. However, if he could shed the credit card debt, he could more easily afford all of his other expenses.

“Straight” Bankruptcy

Generally, homeowners have to file a “Chapter 13” bankruptcy case to save their home. In a Chapter 13 case, a monthly payment plan over a three- to five-year term is proposed by the debtor, reviewed by the trustee, and then approved or denied by the Bankruptcy Judge. However, in the present situation, a Chapter 13 bankruptcy case was not necessary because there was no equity in the house to protect (net equity being the fair market value of the house less the balance due on the mortgage). Accordingly, the decision was made to file a “Chapter 7” bankruptcy case. A Chapter 7 bankruptcy case — also known as a “straight bankruptcy” — is a legal proceeding in which all of the debtor’s ‘unsecured debts’ (such as credit cards, personal loans and lines of credit) are discharged or extinguished. Once the bankruptcy case was filed, the homeowner benefited from the automatic stay provisions of the Bankruptcy Code. Basically, these provisions act as a “Stop Sign” against creditors, prohibiting them from taking any collection actions against debtors. When this homeowner/debtor received his Discharge, by which he discharged or extinguished all of the unsecured credit card debt, he was left with only the mortgage debt (also known as ‘secured debt’ because the house is collateral for the loan).

Mortgage Foreclosure Proceeding — Round Two!

In New York State, when a homeowner/defendant puts in an appearance in a mortgage foreclosure case, the court puts the case onto its Foreclosure Settlement Conference calendar and schedules a conference between the mortgage lender and the homeowner. The purpose of the conference is to see whether there is any way to mediate and settle the dispute, including exploring the loan modification process.

In our present situation, with the bankruptcy case over and the homeowner coming straight out of his Chapter 7 case with his Discharge of all other debts (his “fresh start!”), the mortgage foreclosure proceeding was placed back onto the Supreme Court’s Foreclosure Settlement Conference calendar. Pursuant to the conference, the homeowner applied for loan modification with the mortgage lender and provided all documentation required, including the application, and his tax returns and paystubs.

With no outstanding credit card debt, the homeowner’s salary clearly demonstrated that he had more than sufficient income to support the mortgage and carrying charges of the house. The good news came at the next foreclosure settlement conference: the homeowner’s application to modify his mortgage loan was approved by the lender and the foreclosure proceeding was dismissed. Home! Sweet Home!

by Richard A. Klass, Esq.
©2012 Richard A. Klass.

copyr. 2012 Richard A. Klass, Esq.
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

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Image at top: Flowering Plum Tree, Eragny, 1894, by Camille Pissarro (1830-1903). This image is in the public domain because its copyright has expired. This applies to Australia, the European Union and those countries with a copyright term of life of the author plus 70 years. This image is in the public domain in the United States. This applies to U.S. works where the copyright has expired, often because its first publication occurred prior to January 1, 1923.

R. A. Klass
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