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Nassau County Bar Association

Recent Appellate Term Rulings Make Gaining Possession of Collateral More Difficult for Foreclosing Lenders, Purchasers

The laws regulating New York’s residential landlord-tenant relationships are “a patchwork of legislation that has responded to decades of social, economic and political pressure.”1 In the arena of mortgage foreclosure and its cooperative housing equivalent, the UCC Article 9 sale, the social economic and political pressure, particularly from the Appellate Term, Second Department, has been to make it more and more difficult, and, in the case of residential cooperative units, maybe even impossible, for a lender or any purchaser at these sales, to gain lawful possession of the property.

Must the Attorney be an ‘Exhibitionist’?
Based upon the 2011 decision from the Appellate Term, Second Department in Home Loans Inc. v. Moskowitz,2 it might not be possible to evict occupants after purchasing real property at a foreclosure sale unless you individually show each such occupant the referee’s deed.3

An essential predicate to a motion or summary proceeding for post-foreclosure possession is for the foreclosure purchaser, or his assignee, to somehow present the referee’s deed to the occupants whom the foreclosure purchaser seeks to remove. Where the purchaser is the foreclosure plaintiff and all occupants are subject to the jurisdiction of the foreclosure court,4 the plaintiff/purchaser can move in the foreclosure action for a “Writ of Assistance,” a statutory relief,5 which codifies a relief recognized since the earliest days of New York common law. Where parties in possession were not subject to the foreclosure judgment the more common mode of obtaining possession, at least in downstate counties where court congestion has made motion practice a lengthy affair, is a summary proceeding found in sub-paragraph 5 of the New York Real Property Actions and Proceedings Law (“RPAPL”) section 713.

The Writ of Assistance statute is silent on any predicate demand, but the typical decretal paragraph in most judgments of foreclosure directs “that the purchaser or purchasers at said [foreclosure] sale be let into possession on production of the Referee’s deed or deeds” or similar wording.

To maintain a summary proceeding under RPAPL §713, the petitioner needs to perform two discrete acts, usually, but not necessarily simultaneously:
1) service of a 10-day demand for possession, and
2) that “the deed delivered pursuant to such [foreclosure] sale, or a copy of such deed, certified as provided in the civil practice law and rules, has been exhibited to him.”6

The term ‘exhibited’ is not defined in the RPAPL nor is the author able to locate a statutory definition anywhere else in New York law.

In 2002, a Westchester County Supreme Court Justice in Colony Mtg. Bankers v. Mercado,7 hearing a Writ of Assistance motion predicated on a Notice properly served pursuant to RPAPL § 735, held that “production means exhibiting” of the deed. This equating of one statutorily undefined term with another may help reconcile an earlier pronouncement of the Appellate Division. In Lincoln Sav. Bank v. Warren, the Second Department opined in a Writ of Assistance case that, prior to issuance of the Order, “the referee’s deed should have been exhibited to and possession demanded from [the occupants].”8 Thus, the Court in Colony Mtge. Bankers held that “to exhibit connotes actual presentation to view the document” and, as such, the attachment of the deed to the Notice was insufficient except as to parties personally served. While foreclosure practitioners spent much time and verbiage fretting over Colony Mtge. Bankers, it was seen as a trial level case with distinguishable facts.

Then, in 2011, the Appellate Term, Second Department decided Moskowitz, wherein they cited to Colony Mtge. Bankers, holding that, “in light of the strong policy prohibiting unlawful evictions (see generally Bill Jacket, L 1981, ch. 467), attaching a copy of the referee’s deed to a 10-day notice to quit served by ‘nail and mail’ was insufficient to satisfy the requirement of exhibition of the deed pursuant to RPAPL § 713.” The Moskowitz decision held the service deficient even though the foreclosure purchaser served predicate notice for a summary proceeding “by ‘nail and mail’ service, after four attempts at personal service had been made at different times on different days.”

Does this automatically lead to the conclusion that each and every occupant must be shown the referee’s deed before a sufficient predicate for a summary proceeding or Writ of Assistance is established?
At least one judge, sitting in an upstate Justice Court, has read the decision that way. In U.S. Bank v. Eichenholtz,9 the respondent/occupant in a proceeding pursuant to RPAPL §713(5) argued that the Moskowitz decision mandated that the referee’s deed be ‘personally exhibited’ to the occupant. The Justice Court found that even service on a person of suitable age and discretion was insufficient to constitute ‘exhibiting.’ However, contrarily, in a Suffolk County proceeding, Hudson City Savings Bank v. Lorenz,10 where notice was served by conspicuous service on the fourth attempt, the court, citing the Court of Appeals in Bossuck v. Steinberg,11 reasoned that due process in civil litigation does not require in-hand service and that, as an upstate Justice Court determined in 2006,12 to impose a duty of personal, individual exhibition on each occupant onto a summary proceeding would “create a higher standard for service for the notice and the deed than is needed for the notice of petition and petition.”13 The Judge in Hudson City Savings went on to opine that he was not bound by Moskowitz under stare decisis due to the legislature addressing its concern about unlawful eviction of bona fide tenants by adopted RPAPL §1305, establishing additional notice requirements and rights of tenants to remain in foreclosed properties.

Does this ‘cure’ the seemingly preposterous scenario wherein an occupant of a foreclosed property can render himself ‘eviction proof’ simply by avoiding face-to-face contact with a process server?
Probably not. The real solution is for the legislature to substitute some defined act, (i.e. annex or simply serve in accordance with RPAPL §735) and eliminate the term ‘exhibit’ from RPAPL §713. In the interim, if, as the courts have suggested, ‘exhibit’ is to be given its plain meaning of “to present to view,”14 perhaps ‘nail and mail’ in a separate back, un-obscured by a Notice will suffice to satisfy the statute.

Can a Secured Lender Evict Occupants After a UCC Article 9 Sale?
In Federal Home Loan Mtg. Assoc. v. Perez,15 the Appellate Term, Second Department found no basis in the RPAPL for secured lenders to seek possession of a foreclosed cooperative unit after a UCC sale. The leading treatise on foreclosure had posited that a lender could gain possession based on an execution or based on a terminated license.16 In Perez, the assignee of the UCC 9 sale bid brought a petition for possession and the trial court denied the occupants motion to dismiss, finding that a purchasing lender at a UCC article 9 sale had rights to possession, alternately under RPAPL § 713(1), the section for possession based on an execution, or RPAPL § 713(7), the section applicable to licensees.

The Appellate Term reversed, finding that neither RPAPL § 713(1) nor RPAPL § 713(7) applied, nor could the purchaser find relief under RPAPL § 713 (5), the provision for possession after a real property foreclosure, and posited that “if a new category of summary proceeding is to be created, it is for the legislature, not the courts, to create it (see Rosenstiel v. Rosenstiel, 20 A.D.2d 71 (1963).”17 The Rosenstiel case18 cited by the Appellate Term is a frequently cited case wherein termination of a greater interest (that of an estranged spouse) was held not to be enforceable as a terminated license. The Rosenstiel decision has become the basis for courts hearing summary proceedings to defer marital rights issues to the family courts or matrimonial parts of the Supreme Court.

A lender has the option of commencing a judicial proceeding to foreclose a loan secured by the stock and lease in a cooperative apartment;19 however the virtually universal mode of foreclosing a co-op loan is for the lender to hold a non-judicial sale under UCC Article 9. Because no court is involved, the sale does not generate an execution,20 thus making RPAPL § 713(1) inapplicable.

The court in Federal Home Loan found that the respondent/former shareholder was, at a minimum, a holdover tenant, presuming the proprietary lease had been terminated, a fact not in the record, and not a licensee. Under RPAPL § 713(7), a holdover proceeding may be maintained on the ground that the respondent is a licensee of the person entitled to possession of the property at the time of the license and the license has expired, the licensor has revoked the license, or the licensor is no longer entitled to possession of the property.21 A license is a permission, express or implied, to enter upon or occupy real property, or a personal, revocable, non-assignable privilege from the person entitled to possession.22 The possession of a license is usually non-exclusive.23 Thus, even if the proprietary lease was terminated, the former holder of a cooperative interest, which include a proprietary lease granting exclusive possession of the unit, cannot be seen as a licensee.

The court in Federal Home Loan also rejected “RPAPL 713(5), which provides for the maintenance of a summary proceeding to recover ‘real property’ (RPAPL 701[1]) where ‘the property has been sold in foreclosure’ [as] unavailable” to recover a cooperative unit as not being a sale of ‘real property,’ despite the sui generis nature of cooperatives24 wherein for many purposes co-op leaseholds are treated as realty. However, as discussed above, the express requirements of RPAPL § 713(5) are that the party seeking possession ‘exhibit’ their deed to the occupants they seek to dispossess. Since there is no deed for a co-op, as discussed in the first part of this article, any claim under RPAPL § 713(5) must fail.

The ancient and now codified remedy of ejectment25 also seems to be unavailable as the legislature, in codifying the remedy, expressly denied standing to “a mortgagee, or his assignee, or other representative.”26

The remaining solution appears to be for the lenders to actually seek transfer of the stock and lease into the name of the lender after a UCC sale or, where the co-op won’t permit corporate ownership, transfer of the stock and lease to an individual nominee. Alternately, lenders have a right to re-sell the premises occupied, subject to any conditions and approvals found in the co-op’s governing documents.27 The sale of occupied co-op apartments may be impractical and will assuredly negatively affect purchase offers. If these solutions are unsatisfactory, the lenders, servicers and investment trusts that hold loans secured by cooperative interests will need to invest some of their political capital in seeking a change from Albany.

It should be noted that, under most co-op governing documents, the loss of the shares to a secured party is an independent default under a proprietary lease and, as such, the co-op would have standing to seek possession of a unit after a UCC sale by a secured lender. If the lender/purchaser is able to show the co-op that such a possessory action is in the best interest of all concerned, co-op boards and managers might be willing to proceed against the foreclosed shareholders.

The common thread in the two recent decisions of our Appellate Term is the re-examination of longstanding practices of the lending industry. While it is beyond argument that the industry is deserving of scrutiny, additional impediments to lenders for recovery on bad loans may be counter-productive. The average New York foreclosure now takes 445 days from default to sale,28 with significant ‘due process’ afforded home owners. The literal interpretation for the term “Exhibit” by the court in Home Loans Inc. v. Moskowitz effectively bans substitute service. It is difficult to imagine the legislature intending to make it possible for the occupant of a foreclosed property to avoid eviction by simply averting his or her gaze. It is equally hard to imagine that, while recognizing Co-operative housing as a security interest, the legislature didn’t provide a mechanism for the secured party to get possession of the collateral after foreclosing the secured interest. The court in Federal Home Loan Mtg. Assoc. v. Perez, recognizes this anomaly and correctly points to the legislature to create a new sub-section for RPAPL § 713 relating to cooperatives and, may we suggest, either defining “exhibiting” or simply changing RPAPL § 713(5) to permit annexing a copy of the deed to the 10-day notice.

Dan M. Blumenthal is of counsel to Schneider Mitola LLP, Garden City, concentrating on landlord-tenant, foreclosure and leasing for co-ops, condominiums and real property.

1. La Guardia v. Cavanaugh, 53 N.Y.2d 67, 70, 440 N.Y.S.2d 586 (1981).
2. Home Loan Servs., Inc. v. Moskowitz, 31 Misc.3d 37 (App.Term, 2d Dept. 2011).
3. Alternately, and more commonly, a properly certified copy thereof. See CPLR 2105; Pacific v. Cuevas, 176 Misc.2d 846 (Civ.Ct., Kings Co. 1998).
4. See, The Green Point Savings Bank v. Defour, 162 Misc.2d 476; see also, Nationwide Associates, Inc. v. Brunne, 216 A.D.2d 547). Occupants entering into possession after the filing of a Notice of Pendency may also be proper parties to removal by writ of assistance.
5. RPAPL § 221.
6. RPAPL § 713.
7. 192 Misc.2d 704 (Sup.Ct., Westchester Co. 2002).
8. Lincoln Sav. Bank v. Warren, 156 A.D.2d 510(2d Dept. 1989).
9. 37 Misc.3d 536 (Justie Ct., Yorktown 2012).
10. Hudson City Savings Bank v. Lorenz, 39 Misc.3d 538 (Dist.Ct., Suffolk Co. 2013).
11. 58 N.Y.2d 916, 460 N.Y.S.2d 509 (1983).
12. Novastar Mtge., Inc. v. LeForge, 12 Misc.3d 1179(a) (Sup.Ct., Green Co. 2006).
13. Id.
14. Merriam Webster on-line dictionary #2 definition, http://www.merriam-webster.com/dictionary/exhibit.
15. 40 Misc.3d 1, 968 NYS2d 317 (A.D. 2d Dept., 2013).
16. Bergman, Bruce, New York Mortgage Foreclosures, §37.07.
17. Federal Home Loan, 40 Misc3d at 4.
18. 20 A.D.2d 71 (1st Dept. 1963).
19. See, U.C.C. § 9-601(a)(1).
20. A prerequisite to notice and a basis for a summary proceeding under RPAPL 713-1.
21. RPAPL § 713(7). 22. Todd v. Krolick, 96 A.D.2d 695, 696 (3d Dept. 1983).
23. Chu v. Lee, 39 Misc.3d 147(A) (A.T. 2d decided May 14, 2013).
24. In Re State Tax Commn. v. Shor, 43 N.Y.2d 151, 156 (1977) (“The ownership interest of a tenant-shareholder in a cooperative apartment is sui generis. It reflects only an ownership of a proprietary lease, and therefore arguably an interest in a chattel real, conditional however upon his shareholder interest in the co-operative corporation, an interest always treated as personal property. The leasehold and the shareholding are inseparable. For some special purposes, the real property aspect may predominate”).
25. RPAPL Art. 6.
26. RPAPL 611(3).
27. LI Equity Network, LLC v. Village in the Woods Owners Corp., 79 A.D.3d 26 (2d Dept. 2010)(finding that secured party sale was subject to the governing documents of the co-op corporation notwithstanding the broad language of UCC 9–610).
28. http://www.dfs.ny.gov/consumer/hetptimeline.htm.