new york quiet title law in the
foreclosure defense context
A Discussion of proper pleading, Challenges to mortgage
assignments, and Workout Options for homeowners
I. Quiet title in the foreclosure
context
There are roughly equivalent common law and statutory causes of action to
“quiet title” in NY. Presently, the remedy most frequently invoked to quiet
title is the statutory action to compel the determination of a claim to real
property. NYJUR REALPROPPS § 509. While the statutory action to
determine claims to real property under N.Y. Real Prop. Acts. Law art. 15 is
somewhat similar in result,[FN1] it is not the same as the equitable action
to quiet title or to remove a cloud on title.[FN2] The difference between the
two actions is to be found in the fact that after the statutory action to
determine claims has been commenced, the law permits the defendant who
has been brought in as a claimant to set up his or her own title and
demand affirmative relief.[FN3]. Another difference is that a Plaintiff in the
statutory context is entitle to a jury trial as a matter of right. Nassau County v.
Hardie, 48 N.Y.S.2d 788 (County Ct. 1944).
[FN1] In re Pike St. Borough of Manhattan, City of New York, 101 N.Y.S.2d 457 (Sup 1950); [FN2]
O'Donohue v. Smith, 130 A.D. 214, 114 N.Y.S. 536 (1st Dep't 1909); Meyer v. Wilcox, 136 N.Y.S.
337 (Sup 1912); [FN3] Conde Nast, Inc. v. Town of North Hempstead, 160 Misc. 267, 290 N.Y.S.
300 (Sup 1936).
A. Statutory actions
i. Nature and purpose of relief: An action to compel the determination
of a claim to real property is not an action in equity,[FN1] and yet the relief
awarded is, in a large measure, equitable in nature. Insofar as the
distinction between an action at law and an action in equity is concerned,
the action is a hybrid one,[FN3] and the court will open its equitable
umbrella over the parties and determine the rights and liabilities of
each.[FN4] Such an action is authorized for the purpose of securing
possession and quieting title, for it is to the interest of the community that
real estate shall be readily transferable and that titles thereto shall be
reasonably marketable.[FN8]
[FN1] Tyler v. Jahn, 109 Misc. 425, 178 N.Y.S. 689 (Sup 1919); [FN3] New York and Brooklyn
Suburban Inv. Co. of New York v. Leeds, 100 Misc. 2d 1079, 420 N.Y.S.2d 639 (Sup 1979); Dowd v.
;
Ahr, 168 A.D.2d 763, 563 N.Y.S.2d 917 (3d Dep't 1990) [FN4] New York and Brooklyn Suburban
;
Inv. Co. of New York v. Leeds, 100 Misc. 2d 1079, 420 N.Y.S.2d 639 (Sup 1979) [FN8] Seneca
Nation of Indians v. Appleby, 196 N.Y. 318, 89 N.E. 835 (1909).
A. Statutory actions
The claims which
may be determined in an action to compel the determination of a claim to
real property are limited to those defined in the provisions[FN1] governing
the action,[FN2] and they fall into two classes: claims to an estate and
claims to any other interest, including an easement, lien, or encumbrance
on the real property in question.[FN3] The action must involve a claim to
real property.[FN4]
2. Mortgage lien validity as a determinable claim:
An action to cancel mortgage on realty, brought by alleged legal owner
under recorded deed, is an action to determine a claim to the property.
Pure Strains Farm Co. v. Smith, 99 Misc. 108, 163 N.Y.S. 615 (Sup 1917).
[FN1] N.Y. Real Prop. Acts. Law art. 15; [FN2] Burnham v. Onderdonk, 41 N.Y. 425, 1869 WL 6588
(1869); [FN3] Terrace Hotel Co. v. State, 19 N.Y.2d 526, 281 N.Y.S.2d 34, 227 N.E.2d 846 (1967);
[FN4] Highway Displays, Inc. v. People, 39 Misc. 2d 703, 241 N.Y.S.2d 887 (Sup 1963)
A. Statutory actions
3. Practice and Procedure (Generally):In an action brought under the
provisions relating to actions to compel the determination of a claim to real
property,[FN1] the proceedings are governed by the provisions regulating civil actions,
except as otherwise provided in the article.[FN2] The statutes prescribing the procedure
for compelling the determination of claims to real property do not contain blanket
provisions, but impose certain conditions and limitations upon the maintenance of the
action.[FN3] This being a statutory action, the plaintiff must by pleading and proof bring
it within the terms and conditions of the statute,[FN4] and the defendant is compelled
to assert his or her title or be forever barred.[FN5]
Availability of Injunction: An injunction may be issued in such an action to protect the
possession of the plaintiff during its pendency, where there is danger of his or her possession being
unlawfully disturbed or molested. Dowd v. Ahr, 168 A.D.2d 763, 563 N.Y.S.2d 917 (3d Dep't
1990), order rev'd on other grounds, 78 N.Y.2d 469, 577 N.Y.S.2d 198, 583 N.E.2d 911 (1991).
[FN1] N.Y. Real Prop. Acts. Law art. 15; [FN2] N.Y. Real Prop. Acts. Law § 1519(1); [FN3] Lewis v.
Howe, 174 N.Y. 340, 66 N.E. 1101 (1903) (construing former N.Y. Real Prop. Law art. 15); [FN4]
New York and Brooklyn Suburban Inv. Co. of New York v. Leeds, 100 Misc. 2d 1079, 420 N.Y.S.2d
639 (Sup 1979); [FN5] Best Renting Co. v. City of New York, 248 N.Y. 491, 162 N.E. 497 (1928).
A. Statutory actions
3. Practice and Procedure (Jurisdiction): Generally, the supreme court
has jurisdiction of an action to compel the determination of a claim to real
property, since such court is, by constitutional and statutory provisions, the
principal court of general original jurisdiction in the state.[FN1] The jurisdiction
of each county court, except the county courts of the counties within the City of
New York, extends to an action to compel the determination of a claim to real
property where the real property to which the action relates is situated within
the county.[FN3] If the real property involved or part of it is situated within the
county in the City of New York in which the action is brought, the New York City
Civil Court has jurisdiction of an action to compel the determination of a claim
to real property where the assessed valuation of the property does not exceed
the court's monetary limit at the time the action is commenced.[FN5]
[FN1] N.Y. Jur. 2d, Courts and Judges § 727; [FN3] N.Y. Jud. Law § 190(1); [FN5] N.Y.C. Civ. Ct.
Act § 203(i).
A. Statutory actions
3. Practice and Procedure (limitations): An action to recover real
property or its possession cannot be commenced unless the plaintiff, or his
or her predecessor in interest, was seized or possessed of the premises
within 10 years before the commencement of the action.[FN1] This
limitation period applies to an action to determine claims to real
property.[FN2]
[FN1] N.Y. C.P.L.R. 212(a).
[FN2] James v. Lewis, 135 A.D.2d 785, 522 N.Y.S.2d 897 (2d Dep't 1987) (stating that an action to
compel the determination of a claim to real property was barred, absent proof that the plaintiff was
the owner in possession within 10 years before the commencement of the action); Low v. People,
263 A.D. 434, 33 N.Y.S.2d 1015 (3d Dep't 1942).
A.
Statutory
actions
3. Practice and Procedure (parties):
Appropriate parties to an action to
compel the determination of claims to real property are those claiming an interest in the
disputed property.[FN1] However, an heir or devisee, as the successor in interest of the
ancestor or devisor, is entitled to be substituted for the ancestor or devisor in an action
begun by the latter before his or her death; in fact, the defendants have the right to
compel the devisee to be substituted in the action where there is nothing to show that he
or she renounced his or her interest as devisee under the will.[FN3]
Necessary Party: In an action to compel the determination of a claim to real property, the
person in possession must be made a party to the action. N.Y. Real Prop. Acts. Law §
1511(1). When the person in possession claims the right of possession, or an interest in
the real property, under another, the other person must also be made a party. N.Y. Real
Prop. Acts. Law § 1511(1). A person in possession of property which is the subject of an
action for the determination of a claim to real property must be made a party thereto,
because his or her right to possession would be clearly affected by any judgment
rendered. Burke v. Suburban Mortg. Corp., 43 Misc. 2d 1077, 252 N.Y.S.2d 911 (Sup
1964).
[FN1] Concerned Citizens of Albany-Shaker Road v. State, 140 A.D.2d 842, 528 N.Y.S.2d 230
(3d Dep't 1988); [FN3] Higgins v. City of New York, 136 N.Y. 214, 32 N.E. 772 (1892).
A. Statutory actions
4. Pleading (generally): In an action to compel the determination of a claim to real
property, the proceedings are governed by the provisions regulating civil actions, except as
otherwise provided in the provisions governing such actions.[FN1] Thus, an answer or complaint in
such a proceeding is subject to a motion for a more definite statement.[FN2] The same right of
amendment of pleadings exists in an action to determine adverse claims to real property as exists
in other actions,[FN3] and leave to amend pleadings is to be freely given.
By statute, a complaint in an action to compel the determination of a claim to real property must
state that the action is brought pursuant to the provisions governing such an action. N.Y. Real Prop.
Acts. Law § 1515(1). The complaint must set forth the facts enumerated by the statute.[FN8] It
must set forth facts and not the bare language of the statute.[FN9] The complaint is not required
to allege that the plaintiff has no other adequate remedy except for that provided by the
statute.[FN10]
FN1: N.Y. Real Prop. Acts. Law § 1519(1); [FN2] Noto v. Headley, 39 Misc. 2d 233, 240 N.Y.S.2d
267 (Sup 1963); Bradley v. Condon, 217 N.Y.S.2d 821 (Sup 1961) (complaint); [FN3] Brown v.
Leigh, 49 N.Y. 78, 12 Abb. Pr. N.S. 193, 1872 WL 9881 (1872); [FN8] N.Y. Real Prop. Acts. Law §
1515; [FN9] Queensboro Imp. Co. v. Dean, 175 Misc. 655, 23 N.Y.S.2d 865 (Sup 1940); [FN10]
Noto v. Headley, 39 Misc. 2d 233, 240 N.Y.S.2d 267 (Sup 1963).
A. Statutory actions
4. Pleading (property description): The complaint must describe the
property claimed with common certainty, by setting forth the name of
the township or tract and the number of the lot, if there is any, or in
some other appropriate manner, so that from the description,
possession of the property claimed may be delivered where the plaintiff
is entitled thereto. N.Y. Real Prop. Acts. Law § 1515(2). De minimis
errors are not fatal in this context. Mandel v. Estate of Tiffany, 263
A.D.2d 827, 693 N.Y.S.2d 759 (3d Dep't 1999).
A. Statutory actions
4. Pleading (Plaintiff’s interest):The complaint must set forth facts
showing the plaintiff's estate or interest in the real property, the particular
nature of the estate or interest, and the source from or means by which the
plaintiff's estate or interest immediately accrued to him. [FN1] As a general
rule, it is neither permissible nor necessary to go back and set forth the entire
chain of the plaintiff's title.[FN2] Neither is it necessary, in order to state a
cause of action, that the plaintiff should allege in the complaint that he or she
is the sole owner in fee; the sole ownership is fairly implied from an allegation
that he or she is the owner in fee.[FN3] Accordingly, an allegation that the
plaintiffs are the owners in fee simple and that they acquired title in a year
stated, is a sufficient allegation of the plaintiff's title.[FN4]
[FN1] N.Y. Real Prop. Acts. Law § 1515(1)(a); [FN2] Crook v. Licourt, 216 A.D. 237, 214 N.Y.S. 774
(4th Dep't 1926); [FN3] King v. Townshend, 29 N.Y.S. 181 (Gen. Term 1894); [FN4] Norris v.
Hoffman, 133 A.D. 596, 118 N.Y.S. 156 (1st Dep't 1909), aff'd, 197 N.Y. 578, 91 N.E. 1118 (1910).
A. Statutory actions
4. Pleading (Defendants’ claim to property): The complaint must
allege that the defendant claims, or that it appears from the public
records or from the allegations of the complaint that the defendant
might claim, an estate or interest in the real property adverse to that of
the plaintiff, and it must allege the particular nature of the estate or
interest. N.Y. Real Prop. Acts. Law § 1515(1)(b). A complaint which
does not allege that the defendant makes any adverse claim to the
plaintiff's property, and which fails to state any facts from which such an
inference can be drawn, is insufficient to sustain the action. Beisheim v.
People, 255 A.D. 429, 8 N.Y.S.2d 841 (4th Dep't 1938) (construing
former N.Y. Real Prop. Law art. 15).
A. Statutory actions
4. Pleading (Defendants’ personhood):The complaint must allege whether
any defendant is known or unknown, and whether any defendant is or might be an infant,
mentally retarded, mentally ill, or an alcohol abuser.[FN1] (comic relief).
Naming “DOES”: The complaint must also state whether the judgment will or might affect a
person or persons not in being or ascertained at the commencement of the action who, by
any contingency contained in a devise or grant or otherwise, could afterward become entitled
to a beneficial estate or interest in the property involved, and whether every person in being
who would have been entitled to such estate or interest if such event had happened
immediately before the commencement of the action is named as a party thereto.[FN2]
These provisions indicate that the legislature intended that every plaintiff must set forth facts
showing whether any defendant is known or unknown, showing whether the judgment will or
might affect a person or persons not in being or ascertained at the commencement of the
action, and showing that to ask any plaintiff under these provisions to join all persons who
could possibly be a party defendant would be an impossible task.[FN3]
[FN1] N.Y. Real Prop. Acts. Law § 1515(1)(c); [FN2] N.Y. Real Prop. Acts. Law § 1515(1)(d); [FN3]
Quenas Realty, Inc. v. Engelhardt, 223 N.Y.S.2d 636 (Sup 1961) (construing former N.Y. Real Prop.
Law art. 15).
A. Statutory actions
4. Pleading (Demand for Judgment): The demand for judgment in
an action to compel the determination of a claim to real property may
be to the effect that the defendant and every person claiming under him
or her be barred from all claim to an estate or interest in the property
described in the complaint, or it may demand that possession be
awarded the plaintiff, or may combine two or more of these demands
with other demands for appropriate relief,[FN1]
[FN1] N.Y. Real Prop. Acts. Law § 1515(2); N.Y. Real Prop. Acts. Law § 1515(2); Burke v. Suburban
Mortg. Corp., 43 Misc. 2d 1077, 252 N.Y.S.2d 911 (Sup 1964).
A. Statutory actions
5. Judgments: Final judgment must declare the validity of any claim to any estate or
interest established by any party to the action. The judgment must also declare that any
party whose claim to an estate or interest in the property has been adjudged invalid, and
every person claiming under such party, by title accruing after the filing of the judgment roll,
or of the notice of the pendency of the action, as prescribed by law, is forever barred from
asserting such claim to an estate or interest the invalidity of which is established in the
action, and may direct that any instrument purporting to create any such estate or interest
be delivered up or cancelled of record or be reformed of record as the facts may require.
N.Y. Real Prop. Acts. Law § 1515(2)
Judgment may also be given awarding possession of real property to any party together with
damages for the withholding of such property, and two or more of such forms of judgment
may be awarded in the same action.[FN2] A judgment must declare the rights of the
parties,[FN3] and a court in finding against a plaintiff seeking a declaration of an interest in
land should not dismiss the action or simply find in favor of the defendant but should enter a
judgment with the requisite declarations.[FN4]
[FN2] N.Y. Real Prop. Acts. Law § 1521(1); [FN3] Thomas Gang, Inc. v. State, 19 A.D.3d 861, 797
N.Y.S.2d 583 (3d Dep't 2005); [FN4] Duke v. Sommer, 205 A.D.2d 1009, 613 N.Y.S.2d 985 (3d
Dep't 1994); Iulucci v. James H. Maloy, Inc., 199 A.D.2d 720, 606 N.Y.S.2d 59 (3d Dep't 1993);
Keller v. Village of Castleton-on-Hudson, 173 A.D.2d 979, 569 N.Y.S.2d 491 (3d Dep't 1991).
A. Statutory actions
6. Answers and counterclaims: In an action to compel the determination of a claim
to real property, the defendant may, in his or her answer, deny any material allegation of the
complaint controverted by him or her, or any knowledge or information thereof sufficient to form a
belief, or may set forth facts constituting a defense, and thereupon he or she may demand
judgment dismissing the complaint.[FN1] The requirement governing the complaint to the effect
that the plaintiff must allege the source from or means by which his or her estate or interest
immediately accrued to him or her has been applied to the answer,[FN3] and it imposes on the
defendant the duty of giving particulars of the title.[FN4]
A defendant may demand any judgment to which he or she would be entitled in an action brought
by him or her to recover that estate or to enforce in any manner the interest which he or she
asserts in the property, or he or she may combine any two or more of such demands. N.Y. Real
Prop. Acts. Law § 1517.
[FN1] N.Y. Real Prop. Acts. Law § 1517; [FN3] Hooper v. City of New York, 96 Misc. 47, 160 N.Y.S.
14 (Sup 1916); [FN4] Reformed Protestant Dutch Church of Fordham v. Valentine, 12 N.Y.S.2d 989
(Sup 1939).
A. Statutory actions
7. Burden of proof and Jury trial: In accordance with the general rule that
the party who asserts the affirmative of an issue has the burden of proving it, the
plaintiff in an action to compel the determination of a claim to real property has the
burden of proving the issues upon which his or her cause of action depends. [FN2]
A jury trial is guaranteed in an action for determination of a claim to real property.[FN3]
The failure to specifically allege that the action is brought pursuant to statutes
governing actions to compel determination of a claim to real property is not fatal to a
plaintiff's right to a jury trial.[FN4] The right to a jury trial is to be determined by the
facts alleged in the complaint, and not by the prayer for relief.[FN5] A defendant's
prayer for affirmative relief by way of injunction enjoining the plaintiff from interfering
with the subject matter of an action brought to compel the determination of a claim to
real property is not grounds for denying a jury trial.[FN9]
[FN2] Bing v. People, 254 N.Y. 484, 173 N.E. 687 (1930); [FN3] Paciello v. Graffeo, 8 A.D.3d 543,
779 N.Y.S.2d 526 (2d Dep't 2004); [FN4] Lillianfeld v. Lichtenstein, 181 Misc. 2d 571, 694 N.Y.S.2d
600 (Sup 1999); [FN5] Id.; [FN9] Brewer v. Town of Starkey, 275 A.D. 793, 90 N.Y.S.2d 155 (4th
Dep't 1949).
B. Common Law Actions
1. Nature of action: A quiet-title action, or an action to remove a cloud on title, is a
remedy which originated in the courts of equity. Am. Jur. 2d, Quieting Title and Determination of
Adverse Claims § 1. The general object and purpose of an action to remove a cloud on title is to
have any adverse title that may be asserted under such cloud passed on, and adjudged void, so
that the plaintiff in possession may be forever afterward free from any danger of the hostile
claim.[FN1] More specifically, the purpose of such an action is to procure the cancellation, delivery
up, or release of an instrument, encumbrance, or claim constituting a claim on the plaintiff's title
which could be used to injure or annoy the plaintiff in the enjoyment of his or her title.[FN2]. A
court has jurisdiction to remove an existing cloud on a title,[FN4] or to prevent a threatened
cloud.[FN5]
[FN1] Sanders v. Saxton, 182 N.Y. 477, 75 N.E. 529 (1905); [FN2] Rector, etc., of St. Stephen's
Protestant Episcopal Church v. Rector, etc., of Church of the Transfiguration, 201 N.Y. 1, 94 N.E.
191 (1911); [FN4] Dewitt v. Van Schoyk, 110 N.Y. 7, 17 N.E. 425 (1888); [FN5] King v.
Townshend, 141 N.Y. 358, 36 N.E. 513 (1894).
B. Common Law Actions
2. limitation on action: Although an owner in possession who seeks to
have a cloud on his or her title removed may proceed in equity at any time
without being barred by the statute of limitations,[FN1] a party not in
possession is limited by the six-year limitations period contained in N.Y.
C.P.L.R. 213,[FN2] governing actions for which a limitations period is not
otherwise provided.[FN3] The owner may wait until his or her possession is
disturbed, or his or her title is attacked, before taking steps to vindicate his
or her right.[FN4]
[FN1] Orange and Rockland Utilities, Inc. v. Philwold Estates, Inc., 52 N.Y.2d 253, 437 N.Y.S.2d
;
;
291, 418 N.E.2d 1310 (1981) [FN2] Ford v. Clendenin, 215 N.Y. 10, 109 N.E. 124 (1915) [FN3]
N.Y. C.P.L.R. 213(1), discussed in N.Y. Jur. 2d, Limitations and Laches §§ 210 to 219; [FN4] Ford v.
Clendenin, 215 N.Y. 10, 109 N.E. 124 (1915).
B. Common Law Actions
3. Prerequisites to Action(Possession): In order to bring an action
in equity to quiet title, the plaintiff must be in actual possession of the
real property involved,[FN1] or be in constructive possession following
legal title in the plaintiffs, where no actual hostile occupancy is
shown.[FN2] An action may also be brought when the plaintiff alleges
facts showing that his or her title is contested, and that although he or
she is out of possession, there are special reasons why he or she cannot
sue at law, in ejectment, or otherwise.[FN3]
[FN1] Moores v. Townshend, 102 N.Y. 387, 7 N.E. 401 (1886), aff'd, 118 N.Y. 679, 23 N.E. 1147
(1890); [FN2] Whitney v. Considine Investing Company, 200 A.D. 193, 192 N.Y.S. 957 (2d Dep't
1922); [FN3] O'Donohue v. Smith, 130 A.D. 214, 114 N.Y.S. 536 (1st Dep't 1909).
B. Common Law Actions
3. Prerequisites to Action(No adequate remedy at law): As in
equitable actions generally, a plaintiff in an action in equity to quiet title
must show that he or she has no adequate remedy at law, or that there
are special facts or circumstances which require the intervention of a
court of equity. Thus, the statutory provisions relating to the recovery of
real property and the determination of a claim to real property are
exclusive remedies for any issues coming within the scope of their
provisions, and an action in equity will not lie to accomplish the
purposes for which such statutes were provided unless special facts are
alleged showing that the remedy at law provided by them is not
adequate and that resort must be had to a court of equity to secure
proper relief. Pure Strains Farm Co. v. Smith, 99 Misc. 108, 163 N.Y.S.
615 (Sup 1917)
B. Common Law Actions
4. Mortgage liens as “clouds on title”: When a claim or lien purports to
affect real property, and appears on its face to be valid, but the defect in it can be made
to appear only by extrinsic evidence which will not necessarily appear in proceedings to
enforce the claim or lien, there is a case presented for invoking the aid of equity to
remove such claim or lien which consequently constitutes a cloud on the title. Elmhurst
Fire Co. v. City of New York, 213 N.Y. 87, 106 N.E. 920 (1914)
Instruments executed without authority by agents, officers, and other fiduciaries may be
cancelled as constituting clouds on title. For example, sales and conveyances by
administrators and executors which are invalid because made without authority may be
set aside as clouds.[FN1] Moreover, where an agent makes unauthorized alterations in a
deed or mortgage,[FN2] or where officers of a membership corporation make a
conveyance without the authority of the trustees,[FN3] the instrument constitutes a
cloud on the title.
[FN1] Butler v. Johnson, 111 N.Y. 204, 18 N.E. 643 (1888); [FN2] Smith v. Fellows, 41 N.Y. Super.
Ct. 36 (1876); [FN3] Rozwadow Young Men's Ass'n v. Langweil, 136 N.Y.S. 1065 (Sup 1912).
B. Common Law Actions
4. Mortgage liens as “clouds on title” (COnt’d): The fact alone that a
party executes a mortgage which he or she later seeks to remove as a
cloud on title does not deprive him or her of the right to maintain the
action.[FN5] Instead, if the mortgage debt has been paid, if it is by law
presumed to have been paid, or if the mortgage is invalid, the mortgagor
may be entitled to maintain an equity action to have the apparent lien of
the mortgage removed as a cloud on the mortgagor's title.[FN6]
[FN5] Greenberg v. Schwartz, 273 A.D. 814, 76 N.Y.S.2d 95 (2d Dep't
1948).
[FN6] Reich v. Cochran, 213 N.Y. 416, 107 N.E. 1029 (1915); Miner v.
Beekman, 50 N.Y. 337, 14 Abb. Pr. N.S. 1, 1872 WL 10019 (1872).
B. Common Law Actions
5. Procedures, parties, and judgment: The process, pleadings, motions, trial,
and judgment in an action in equity to quiet title or remove a cloud on title are governed generally
by the Civil Practice Law and Rules. In New York there is no distinction between actions at law and
suits in equity, nor between the forms of those actions and suits.[FN1] However, although the Civil
Practice Law and Rules have abolished the distinctions between actions at law and suits in equity,
such distinction still exists as part of the framework within which civil legal proceedings are
brought.[FN2]
The procedures, parties, and judgment in the common law framework is nearly identical to those in
the statutory context, with limited exceptions. As such, a detailed discussion of the common law
authorities is omitted.
[FN1] N.Y. Jur. 2d, Actions § 1; [FN2] N.Y. Jur. 2d, Actions § 4.
C. post-foreclosure sale relief
1. nature of claim: When real property has been sold pursuant to a
judgment in an action brought under the provisions governing actions to
foreclose a mortgage[FN1] or the provisions governing the foreclosure
of a mortgage by advertisement,[FN2] or has been conveyed to the
mortgagee or the designee of the mortgagee by deed in lieu of
foreclosure, and it appears from the public records or from the
allegations of the complaint that the judgment, sale, or conveyance was
or may have been, for any reason, void or voidable as against any
person, including an owner of the real property mortgaged, an action
may be maintained pursuant to the provisions governing actions to
compel the determination of a claim to real property[FN3] to determine:
[FN1] N.Y. Real Prop. Acts. Law art. 13; [FN2] N.Y. Real Prop. Acts. Law art. 14; [FN3] N.Y. Real
Prop. Acts. Law art. 15.
C. post-foreclosure sale relief
1. nature of claim (Cont’d): (1) the right of any person to set aside
such judgment, sale, or conveyance; (2) the right of any person to
enforce an equity of redemption; (3) the right of any person to recover
possession of the property; or (4) the right of any junior mortgagee to
foreclose a mortgage.
Such an action may be maintained even though an action against the
defendant to foreclose the mortgage under which the judgment, sale, or
conveyance was made, or to extinguish a right of redemption, would be
barred by the statutes of limitation. N.Y. Real Prop. Acts. Law § 1503.
C. post-foreclosure sale relief
2. limitation on action: An action upon a bond or note, the
payment of which is secured by a mortgage upon real property, or
upon a bond or note and the mortgage so secured, or upon a
mortgage of real property, or any interest therein, must be
commenced within six years. [FN1] N.Y. C.P.L.R. 213(4),
discussed in N.Y. Jur. 2d, Limitations and Laches § 176.
C. post-foreclosure sale relief
3. necessity of possession exception: With respect to real property
that has been sold pursuant to a judgment in an action brought under
the provisions governing actions to foreclose a mortgage[FN1] or the
provisions governing the foreclosure of a mortgage by
advertisement,[FN2] or that has been conveyed to the mortgagee or the
designee of the mortgagee by deed in lieu of foreclosure, an action to
determine claims where the foreclosure of a mortgage was void or
voidable may be brought by the purchaser or the mortgagee or
designee, or the successor of any such person, in possession of the real
property.[FN3]
[FN1] N.Y. Real Prop. Acts. Law art. 13; [FN2] N.Y. Real Prop. Acts. Law art. 14; [FN3] N.Y. Real
Prop. Acts. Law § 1503.
C. post-foreclosure sale relief
4. Judgments: Party may maintain an action as provided in this
article to determine the right of any person to set aside such
judgment, sale or conveyance or to enforce an equity of
redemption or to recover possession of the property, or the right
of any junior mortgagee to foreclose a mortgage. Such action
may be maintained even though an action against the defendant
to foreclose the mortgage under which the judgment, sale or
conveyance was made, or to extinguish a right of redemption,
would be barred by the statutes of limitation. RPAPL § 1503.
D. case study: proper pleading of statutory
action
Barberan v. Nationpoint, 706 F.Supp.2d 408
S.D.N.Y., 2010.
FACTS:
(“Plaintiffs”), proceeding pro se, bring this action against Nationpoint, a Division
of National City Bank (“Nationpoint”), Mortgage Electronic Registration Systems, Inc., Atima
(“MERS”), Home Loan Services, Inc. d.b.a. Nationpoint Loan Services (“HLS”), LaSalle Bank
National Association as Trustee for First Franklin Loan Trust 2006–FF–18, Mortgage Loan Asset–
Backed Certificates, Series 2006–FF18 (“LaSalle”), First Franklin Mortgage Loan Trust Mortgage
Loan Asset–Backed Certificates, Series 2006–FF18 (“Franklin Certificates”), and “unknown
owners of the evidence of the debt and/or owners of the note,” asserting claims to quiet title
to the property.
Plaintiffs allege that MERS concealed the identity of the party for which it acted as a nominee
and “falsely represent[ed] that MERS is still nominee.” ( Id. ¶ 31.) Plaintiffs further allege that
MERS “recorded, or intends to record, a false assignment of the alleged loan” to unknown
owners of the Note. ( Id. ¶ 77.) According to Plaintiffs, LaSalle is “not the holder of any note
[or] mortgage relevant to Plaintiffs,” despite LaSalle's claims to the contrary. ( Id. ¶¶ 38–39.)
Plaintiffs also claim that LaSalle and HLS “started foreclosure proceedings” on the Property in
New York state court ( id. ¶ 126), and that HLS reported the foreclosure proceedings to credit
bureaus, ( id. ¶ 127.) As a result, Plaintiffs allege that some of their credit cards were canceled
and that their credit limit was decreased. ( Id. ¶ 128.)
Barberan v. Nationpoint, 706 F.Supp.2d 408
S.D.N.Y., 2010.
standard of Review:On a Rule 12(b)(6) motion to dismiss a complaint, the court
must accept a plaintiff's factual allegations as true and draw all reasonable inferences in [the
plaintiff's] favor.” *413 Gonzalez v. Caballero, 572 F.Supp.2d 463, 466 (S.D.N.Y.2008); see
also Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir.2008). Accordingly, the Court will
analyze whether Plaintiffs have adequately stated a claim for either an equitable quiet title
claim or a claim pursuant to RPAPL Article 15.
ruling as to QT: Here, Plaintiffs allege that they are in actual possession of the
Property. (Am. Compl. ¶ 85.) Plaintiffs further claim that the Mortgage and Note, documents
that Defendants believe are valid on their face, are actually invalid clouds on Plaintiffs' title to
the Property because Plaintiffs never signed these documents. ( Id. ¶¶ 53–54.) Plaintiffs also
allege that Defendants inserted false statements or fraudulently altered the mortgage
documents ( id. ¶¶ 60, 81), and that LaSalle's purported assignment is fraudulent, ( id. ¶¶
77, 82, 92). Thus, Plaintiffs have alleged facts sufficient to establish a plausible equitable
quiet title claim against Nationpoint, MERS, and LaSalle.
Barberan v. Nationpoint, 706 F.Supp.2d 408
S.D.N.Y., 2010.
ruling as to QT (Con’d): Although somewhat unclear, Plaintiffs also appear to assert
that Nationpoint, or MERS as its nominee, may claim an interest in the Property adverse to
their own interest by stating that “[n]one of the Defendants” are owners or holders of the
Note ( id. ¶ 78), that “[t]he Holder, or a previous holder, has discharged the Promissory Note
by materially and fraudulently altering it, and/or cancelling and/or renouncing it” ( id. ¶ 81),
and that “the alleged Mortgage has never been assigned by the Lender,” ( id. ¶ 82).
The court said “Plaintiffs have sufficiently stated a claim under RPAPL Article 15 against
LaSalle. Plaintiffs adequately describe the Property, including its address. (Am. Compl. ¶ 47.)
Plaintiffs also claim absolute ownership of the Property, describing their interest as “superior
and legal title” to the Property. ( Id. ¶ 87.) Plaintiffs further allege that LaSalle currently
claims an interest in the Property adverse to their interest through the alleged mortgage,
note, and assignment. ( Id. ¶ 38.) Thus, Plaintiffs have adequately alleged facts supporting
an RPAPL Article 15 claim against LaSalle. see also *420 Harris v. Thompson, No.
296152008, 24 Misc.3d 1248(A), 2009 WL 2915312, at *5 (Sup.Ct. Sept. 10, 2009) (finding
plaintiffs' allegations that assignor of mortgage to defendant was not a bona fide
encumbrancer sufficient to state claim pursuant to RPAPL Article 15).”
Barberan v. Nationpoint, 706 F.Supp.2d 408
S.D.N.Y., 2010.
ruling as to QT (Con’d): As to Nationpoint and MERS, the court said
“Construing Plaintiffs' pro se Amended Complaint liberally, the Court finds that
these claims adequately allege that Nationpoint and MERS may claim an interest in
the Property on the theory that the mortgage and note were never assigned to
LaSalle.”
Defendants Arguments FAIL: Defendants' arguments are not to the contrary. Defendants
contend that Plaintiffs' claims must fail because the mortgage, note, and assignment are
valid and enforceable. (Defs.' Mem. 8–10.) However, the fact that a plaintiff “executed the
mortgage which he now seeks to remove as a cloud on title does not deprive him of the right
to maintain [a quiet title] action.” Greenberg v. Schwartz, 273 A.D. 814, 76 N.Y.S.2d 95, 96
(1948); see also Cain v. Bethea, No. 04–CV–3946, 2007 WL 2859681, at *10–12 (E.D.N.Y.
Aug. 17, 2007), adopted in part and rejected in part on other grounds, No. 04–CV–3946,
2007 WL 2846914 (E.D.N.Y.2007) (finding material issues of fact and denying summary
judgment claim in RPAPL Article 15 action in which plaintiff claimed she did not knowingly
sign deed conveying her property because she believed the document was a refinancing);
Johnson v. Melnikoff, 65 A.D.3d 519, 882 N.Y.S.2d 914, 915 (2009) (granting summary
judgment to plaintiff who signed deed when plaintiff showed deed was obtained through false
pretenses).
E. Assignee’s standing to foreclose
1. Standing Generally:In order to commence a foreclosure action, a
plaintiff must have a legal or equitable interest in the mortgage. A
plaintiff has standing where it is the holder or assignee of both the
subject mortgage and of the underlying note at the time the action is
commenced Deutsche Bank Nat. Trust Co. v. Barnett 88 A.D.3d
636, 931 N.Y.S.2d 630 (2011) (citing Bank of N.Y. v. Silverberg, 86
A.D.3d 274, 926 N.Y.S.2d 532; Aurora Loan Servs., LLC v. Weisblum,
85 A.D.3d 95, 923 N.Y.S.2d 609; Wells Fargo Bank, N.A. v. Marchione,
69 A.D.3d 204, 207, 887 N.Y.S.2d 615; U.S. Bank, N.A. v. Collymore,
68 A.D.3d 752, 890 N.Y.S.2d 578; Countrywide Home Loans, Inc. v.
Gress, 68 A.D.3d 709, 888 N.Y.S.2d 914).
E. Assignee’s standing to foreclose
1. Standing Generally (cont’d): Either a written assignment of the
underlying note or the physical delivery of the note prior to the
commencement of the foreclosure action is sufficient to transfer the
obligation, and the mortgage passes with the debt as an inseparable
incident. U.S. Bank, N.A. v. Adrian Collymore, 68 A.D.3d 752, 890
N.Y.S.2d 578 (2d Dep't 2009); see Deutsche Bank Nat. Trust Co. v.
Barnett, 88 A.D.3d 636, 931 N.Y.S.2d 630 (2d Dep't 2011).
E. Assignee’s standing to foreclose
2. assignee fills shoes of originator: It has long been the law of
New York that the assignee of a mortgage not securing a negotiable
instrument is subject to any preexisting equities in favor of the
mortgagor which existed against the assignor.[FN1] It is also well
settled that an assignee of a mortgage must take it subject to the
equities attending the original transaction.[FN2] If the mortgagee
cannot enforce the mortgage, the assignee has no greater
rights.[FN3]
[FN1] Trustees of Union College v. Wheeler, 61 NY 88; Beck v. Sheldon, 259 NY 208, 181 NE 360;
Davis v. Beckstein, 69 NY 440; Ingraham v. Disborough, 47 NY 21; [FN2] Trustees of Union College
v. Wheeler, 61 NY 88; Lapis Enterprises, Inc. v. International Blimpie Corp., 84 App Div 2d 286, 445
NYS2d 574; [FN3] Id.
E. Assignee’s standing to foreclose
3. Mortgage assignments generally: Because a mortgage is merely
an incident to the debt which it is intended to secure, a transfer of
the mortgage without the debt is a nullity and no interest is acquired
by it.[FN1] The security cannot be separated from the debt and exist
independently of it.[FN2] Similarly, since a mortgage is a mere
incident of the bond or collateral security for the debt, an
assignment of the mortgage lien without an assignment of the debt
is, in law, a nullity.[FN3]
[FN1] Bank of New York v. Silverberg, 86 A.D.3d 274, 926 N.Y.S.2d 532 (2d Dep't 2011); [FN2]
Merritt v. Bartholick, 36 NY 44; [FN3] Flyer v. Sullivan, 284 App Div 697, 134 NYS2d 521.
E. Assignee’s standing to foreclose
4. properly effecting mortgage assignments: Even in the absence of
an endorsement or other written transfer, the delivery of a bond or note with
the intent to assign it operates as an assignment of the debt and, therefore, of
the mortgage.[FN8] An assignment may be effected by delivery of the bond or
note, or other evidence of debt, together with the mortgage.[FN9] While an
assignment may, in some circumstances, be done by spoken word,[FN10] a
written assignment is the surest and safest method of accomplishing a transfer.
Of course, the assignment must be in writing to obtain the benefits of
recording. It is not necessary to specifically prove that a written assignment
was made for good and valuable consideration since consideration for a written
assignment is presumed.[FN12] The assignee's possession of an instrument of
assignment is presumptive evidence of delivery of the instrument for valid
consideration.[FN13]
[FN8] Weaver Hardware Co. v. Solomovitz, 235 NY 321, 139 NE 353; Curtis v. Moore, 152 NY 159,
46 NE 168; [FN9] Id.;[FN10] Levy v. Louvre Realty Co., 222 NY 14, 118 NE 207; [FN12] Gen
Obligations Law § 5-1107; [FN13] Davin v. Isman, 228 NY 1, 126 NE 257.
E. Assignee’s standing to foreclose
4. properly effecting mortgage assignments (Cont’d):
An
assignment which is champertous is not enforceable because it is in
contravention of public policy and thus champerty may be asserted in defense
to an action brought by the assignee.[FN15] To fall within the statutory
prohibition against champerty, an assignment must be made for the very
purpose of bringing suit. If the assignment is made for a legitimate business
purpose, suit may be brought.[FN15.50] The provisions of the Uniform
Commercial Code, rather than the Real Property Actions and Proceeding Law,
apply to all facets of transactions using mortgages and notes as collateral
except those issues that arise when the mortgage creditor is attempting to
enforce the mortgagee's rights under the mortgage.[FN16]
[FN15] See Gen Obligations Law § 13-101; Transbel Inv. Co. v. Roth, 36 F Supp 396; Frank H.
;
Zindle, Inc. v. Friedman's Express, 258 App Div 636, 17 NYS2d 594 See Federal Deposit Ins.
Corp. v. Suffolk Place Associates, Inc., 270 A.D.2d 304, 704 N.Y.S.2d 300 (2d Dep't 2000); [FN16]
Federal Deposit Ins. Corp. v. Forte, 94 App Div 2d 59, 463 NYS2d 844.
E. Assignee’s standing to foreclose
5. COntents of written assignment: An allonge endorsement of a
mortgage note that constitutes a negotiable instrument effectively
transfers any mortgage given as security for the note as an incident
thereof.[FN8.60] An assignment in blank has been held to be
invalid.[FN9] This holding comports with the ruling of the Court of
Appeals with regard to a mortgage in blank, which held that an
instrument purporting to be a mortgage, but which is left blank as to
the name of the payee, is absolutely void.[FN10]
[FN8.60] Wells Fargo Bank, NA v. Perry, 23 Misc. 3d 827, 875 N.Y.S.2d 853 (Sup 2009); [FN9]
Curtis v. Cutler, 76 F 16; [FN10] Hurlburt v. Walker, 258 NY 8, 179 NE 34, followed Chauncey v.
Arnold, 24 NY 330.
E. Assignee’s standing to foreclose
5. COntents of written assignment (cont’d): The assignment should not
be worded to imply or indicate that an assignment of the mortgage only is
intended. While an assignment of the debt will automatically carry with it an
assignment of the security for it,[FN13] an assignment of the security interest
alone, without an assignment of the debt, may be considered a nullity[FN14] if it
can be established that no assignment of the debt was intended and an instrument
of obligation was originally given.[FN15]
It has likewise been held that the assignment of a bank's beneficial
interest under a mortgage, rather than the mortgage note or underlying
obligation, will not confer standing upon the putative mortgagee to bring a
foreclosure action.[FN16]
[FN13] Jackson v. Blodget, 2 Cow 202; In re Falls, 31 Misc 658, 66 NYS 47 affd 66 App Div 616, 73
NYS 1134; [FN14] In re Pirie, 198 NY 209, 91 NE 587; Merritt v. Bartholick, 36 NY 44; Cooper v.
Newland, 17 Abb Prac 342; [FN15] Campbell v. Birch, 60 NY 214; Syracuse Sav. Bank v. Merrick,
96 App Div 581, 89 NYS 238, revd on other grounds 182 NY 387, 75 NE 232; [FN16] Deutsche
Bank Nat. Trust Co. v. McRae, 27 Misc. 3d 247, 894 N.Y.S.2d 720 (Sup 2010).
E. Assignee’s standing to foreclose
The
discussion in the preceding section was specifically limited to those
cases where the debt was not evidenced by negotiable commercial
paper. Where the debt is so evidenced, there are many problems
created by the interaction of the Uniform Commercial Code and the law
of mortgages. The most important of these concerns defenses available
to the mortgagor against the holder of the paper after its transfer by
the original mortgagee. New York early adopted the rule that the holder
in due course of such negotiable paper, whether a note or a bond, is not
subject to any defenses or equities raised against his transferer by the
mortgagor, save those which can be raised against the note itself under
the Uniform Commercial Code. See Trustees of Union College v.
Wheeler, 61 NY 88; Moore v. Metropolitan Nat. Bank, 55 NY 41.
5. interaction of state assignment law and the UCC:
E. Assignee’s standing to foreclose
6. SOME ADDITIONAL PRACTICE SUGGESTIONS: The
assignment should always be checked for language assigning the bond
as well as the mortgage; it should not be accepted unless the original
bond, mortgage and related instruments are delivered with it. The
assignee should always require an assignment with a covenant as to the
principal balance due, and appropriate estoppel certification, as has
been pointed out. While the assignment is usually expressed as being in
consideration of a nominal sum (e.g., "one dollar and other good and
valuable consideration"), the assignment made by an executor,
administrator, trustee or other fiduciary should express on its face the
full consideration, except that this is not essential when it is part of the
distribution of the estate or corpus. 1 Mortgages and Mortgage
Foreclosure in N.Y. § 18:13
F. TWO CASE STUDIES ON
DENIAL OF STANDING TO
FORECLOSE
Deutsche Bank Nat. Trust Co. v. Barnett, 88 A.D.3d 636, 931
N.Y.S.2d 630, N.Y.A.D. 2 Dept.,2011.
Deutche Bank sought foreclosure and was granted summary judgment.
Homeowner appealed contending there was insufficient evidence to support
the finding that Plaintiff had “standing” to foreclose, and other material fact
issues were raised in homeowners responses.
Facts:
Ruling: “The documentation submitted failed to establish*638 that, prior to
commencement of the action, the plaintiff was the holder or assignee of both the note
and mortgage. The plaintiff submitted copies of two different versions of an undated
allonge which was purportedly affixed to the original note pursuant to UCC 3–202(2) (
see Slutsky v. Blooming Grove Inn, Inc., 147 A.D.2d 208, 212, 542 N.Y.S.2d 721).
Moreover, these allonges purporting to endorse the note from First Franklin, A **632
Division of National City Bank of Indiana (hereinafter Franklin of Indiana) to the plaintiff
conflict with the copy of the note submitted, which contains undated endorsements from
Franklin of Indiana to First Franklin Financial Corporation (hereinafter Franklin
Financial), then from Franklin Financial in blank.”
Deutsche Bank Nat. Trust Co. v. Barnett, 88 A.D.3d 636, 931
N.Y.S.2d 630, N.Y.A.D. 2 Dept.,2011.
RULING (CONT’D): The plaintiff also failed to establish that the note was
physically delivered to it prior to the commencement of this action. The vice president of
the plaintiff's servicing agent and the plaintiff's counsel both affirmed that the original
note is in the possession of the plaintiff's counsel. However, the affidavits did not state
any factual details concerning when the plaintiff received physical possession of the note
and, thus, failed to establish that the plaintiff had physical possession of the note prior
to commencing this action ( see Aurora Loan Servs., LLC v. Weisblum, 85 A.D.3d at
108, 923 N.Y.S.2d 609; U.S. Bank, N.A. v. Collymore, 68 A.D.3d at 754, 890 N.Y.S.2d
578).
Finally, the Certificates of Resolution and Incumbency submitted to establish the
authority of one Eileen Gonzales to execute a September 14, 2007, assignment of
mortgage from Franklin Financial to the plaintiff were executed after the subject
assignment and, thus, cannot establish that she had such authority at the time the
mortgage assignment was made. These inconsistencies raise an issue of fact as to the
plaintiff's standing to commence this action. Thus, the Supreme Court should have
denied those branches of the plaintiff's motion which were to strike the answer, for
summary judgment on the complaint, and for an order of reference; the cross motion
was properly denied ( see U.S. Bank N.A. v. Madero, 80 A.D.3d 751, 753, 915 N.Y.S.2d
612).
U.S. Bank, N.A. v. Adrian Collymore, 68 A.D.3d 752, 890
N.Y.S.2d 578, N.Y.A.D. 2 Dept.,2009.
Facts: On January 15, 2008, the Bank commenced this foreclosure action alleging that it was the
holder of the note and mortgage, and that the defendant had defaulted upon his payment
obligations as of August 1, 2007. In his verified answer, the defendant alleged lack of standing as
an affirmative defense. The Bank thereafter moved, inter alia, for summary judgment and to
appoint a referee to compute the sums due and owing under the note and mortgage, and the
defendant cross-moved to dismiss the complaint, alleging, inter alia, that the Bank lacked standing
to commence this action.
RULING: BANK Failed to demonstrate its prima facie entitlement to judgment as a matter of law
because it did not submit sufficient evidence to demonstrate its standing as the lawful holder or
assignee of the subject note on the date it commenced this action. The Bank's evidentiary
submissions were insufficient to establish that MERS effectively assigned the subject note to it prior
to the commencement of this action ( see Slutsky v. Blooming Grove Inn, 147 A.D.2d 208, 212,
542 N.Y.S.2d 721), and the mere assignment of the mortgage without an effective assignment of
the underlying note is a nullity ( see Merritt v. Bartholick, 36 N.Y. at 45; Kluge v. Fugazy, 145
A.D.2d at 538, 536 N.Y.S.2d 92). Furthermore, the Bank failed to establish that the note was
physically delivered to it prior to the commencement of the action. The affidavit of a vice president
of the Bank submitted in support of summary judgment did not indicate when the note was
physically delivered to the Bank, and the version of the note attached to the vice president's
affidavit contained an undated indorsement in blank by the original lender.
U.S. Bank, N.A. v. Adrian Collymore, 68 A.D.3d 752, 890
N.Y.S.2d 578, N.Y.A.D. 2 Dept.,2009.
Furthermore, the Bank's reply submissions included a
different version of the note and an affidavit from a director of the
Residential Funding Corporation which contradicted the affidavit of the
Bank's vice president in tracing the history of transfers of the mortgage
and note to the Bank. In view of the Bank's incomplete and conflicting
evidentiary submissions, an issue of fact remains as to whether it had
standing to commence this action. Accordingly, those branches of the
Bank's motion which were for summary judgment and to appoint a
referee to compute the sums due and owing under the note and
mortgage were properly denied ( see TPZ Corp. v. Dabbs, 25 A.D.3d
787, 789, 808 N.Y.S.2d 746).
RULING (CONT’D):
F. BASIC MORTGAGE WORKOUT
OPTIONS
BASICS OF A WORKOUT: One of the primary reasons for the
lender to agree to a workout of a securitized loan is to have the
borrower reconfirm the original information that the lender received
and, most importantly, waive any claims that the borrower may have
or think that he or she may have against the lender. Considering the
cost of litigation with the borrower or other creditors, even one with
a limited or nonexistent claim, executing an agreement providing the
borrower with a short respite to get its affairs in order or attempt to
solve some or all of its financial problems is a small price to pay for
the peace of mind that can be achieved through an agreement that
contains a waiver of the lender.
•
F. BASIC MORTGAGE WORKOUT
OPTIONS
B. Voluntary or involuntary bankruptcy by the Borrower.
•
C. Litigation over the loan or over acts by the parties. YES!
•
D. Workout with the property being deeded to third party.
•
E. Workout with an uncontested foreclosure and agreement.
•
F. Restructuring the loan. A restructuring of the debt usually takes one of these forms:
•
a. Transfer of real estate from the borrower to the lender to fully or partially satisfy the
debt (deed in lieu of foreclosure).[FN1.30]
•
b. The transfer of an equity interest to the lender to fully or partially satisfy the
debt.[FN1.70]
F. BASIC MORTGAGE WORKOUT
OPTIONS
c. Modification of terms of a debt, such as one or a combination
of:
•
— Reduction of the interest rate.
•
— Extension of the maturity date at an interest rate that is lower
than market rate.
•
— Reduction of the face amount of the loan.
•
— Reduction of accrued interest.
F. BASIC MORTGAGE WORKOUT
OPTIONS
Modification Tax Consequences: Where the change (or changes) in
the existing debt obligation (whether by modification, forbearance,
disbursement of funds not provided for in the original debt instrument,
etc.) is so substantial as to amount virtually to the issuance of a new
security, the same income tax consequences will follow as if a new
security were actually issued, i.e., the modified debt instrument will be
treated as a new debt instrument given in consideration for the old,
unmodified debt instrument.
The old debt instrument will be treated as “property” for purposes of §
1274 of the Internal Revenue Code (the “Code”), and under Treas. Reg.
Sec. 1.1001-1(a), the gain or loss from the conversion of such property
into cash, or from the exchange of such property for other property
differing materially either in kind or in extent, will be treated as income or
as loss sustained, depending on the taxpayer's adjusted basis in the debt
instrument and the amount realized from the “disposition” of the property.
F. BASIC MORTGAGE WORKOUT
OPTIONS
NOTE ON MODIFICATION:The parties to a loan modification agreement,
as well as title insurers, should be careful that, as a result of mortgage
securitizations and the sale of many loans into the secondary market,
the proper lender party is executing the modification agreement and
that the “trail” of any assignments is set forth with specificity in the
modification agreement. For example, Fannie Mae issued Announcement
06-18 (“Modification Announcement”) on October 4, 2006, with respect
to documenting modifications of both adjustable rate and fixed rate
conventional mortgages in a mortgage pool. 1 L. Distressed Real Est. §
3A:21
F. BASIC MORTGAGE WORKOUT
OPTIONS
OPtion 2: Reinstatement of mortgage.
When or if acceleration actually occurs can have crucial consequences for the
mortgagor who seeks to cure by reinstating the mortgage by tendering
arrearages. While such a tender prior to acceleration will defeat foreclosure,
once a valid acceleration takes place, only tender of the accelerated amount will
accomplish this.[FN1] For example in Florida, a mortgagor has the right to
reinstate a mortgage by tendering all arrearages due on the mortgage before
the mortgagee exercises the option to accelerate.[FN2] Generally, acceleration
of the mortgage terminates the right of the mortgagor to reinstate by tendering
all arrearages.[FN3]
[FN1] Nelson and Whitman, § 7.6. Acceleration clauses—In general, Real Estate Finance Law
(Practitioner Treatise 5th ed. 2007 & Westlaw database REALFNLAW); [FN2] River Holding Co. v.
Nickel, 62 So. 2d 702 (Fla. 1952); [FN3] Old Republic Ins. Co. v. Lee, 507 So. 2d 754 (Fla. Dist. Ct.
App. 5th Dist. 1987).
F. BASIC MORTGAGE WORKOUT
OPTIONS
OPTION 3: Deed in lieu of foreclosure
If after default by the borrower it becomes evident that the ownerborrower may not be able to financially afford the mortgaged
property, the lender and borrower often consider a “deed in lieu of
foreclosure.” In consideration of the lender not proceeding with
foreclosure, the borrower deeds the property to the lender. There are
significant advantages to both the lender and borrower. However,
there are potential pitfalls especially for the lender.
F. BASIC MORTGAGE WORKOUT
OPTIONS
OPTION 4: Forbearance
When circumstances make it impossible for the borrower to make
any payments at all for some time, a lender might consider a
“forbearance plan” that would allow the borrower to suspend
payments or make reduced payments for a specified length of time.
In most cases the borrower must have established a record of
prompt payments with the lender before the onset of the present
difficulty, and it generally must be feasible to bring the loan out of
default in no longer than 18 months. Normally the lender will add
the missed payments plus interest to the loan balance. However,
workout plans that increase the debt may significantly result in
redefault by the borrower.
F. BASIC MORTGAGE WORKOUT
OPTIONS
OPTION 5: TAKE IT ALL THE WAY AND QUIET TITLE IF THE
FACTS BEAR IT OUT AND THE CLIENT HAS ENOUGH GUT
TO STOMACH THE LITIGATION.
WITHOUT THE CASES WHERE WE GO ALL THE WAY THE
SETTLEMENT/WORKOUT LEVERAGE WE CAN OBTAIN
DIMINISHES.
POST SCRIPT
Substantial portions of this presentation were taken from the
following secondary sources:
New York Jurisprudence 2d
mortgages and mortgage foreclosure in new york
Law of distressed real estate
Conclusion
The end - or rather just the beginning. over 60 million
securitized loans between 1998 and 2008.