Steven Glassberg, Glassberg & Associates

Typically, in New York,  priority of liens is determined by the chronological order in which a lien is recorded. New York Real Property Law, section 339-z provides an exception to that rule. New York Real Property Law, section 339-z provides that the board of managers of a condominium has a lien, for unpaid common charges, on each individual unit which is superior to all liens except for a first mortgage and certain other statutory exemptions.  In the event a condominium unit owner fails to pay common charges, condominiums, through their board of managers, have the ability to bring a foreclosure action against the unit owner to recover the unpaid common charges. In the event of a foreclosure, any subordinate liens, including a second mortgage would be wiped out. The winning bidder of this type of foreclosure auction, a foreclosure to collect unpaid common charges brought by the board of managers, will typically own the condo subject only to the existing first mortgage.

Recently, the issue of what constitutes a first mortgage–whether an entire consolidated mortgage should be considered a first mortgage or only the first recorded mortgage within a consolidated mortgage should be considered the first mortgage–in the context of a foreclosure action brought by a condominium’s board of managers was before our state’s highest court.

In Plotch v Citibank, N.A. 2016 NY Slip Op 03648, decided on May 10, 2016, the Court of Appeals dealt with this issue. The plaintiff was the winning bidder at a foreclosure auction, brought by a board of managers, and purchased a condo at a foreclosure auction for $15,100 subject to the existing first mortgage. The previous owner took out two mortgages, totaling $92,000, which were consolidated into one mortgage.  The two mortgages were consolidated “into a single mortgage lien when the second mortgage was entered into. The “first” mortgage was for $54,000 and the “second” was for $38,000.

Plotch commenced an action seeking a judgment declaring that the “second” mortgage, for $38,000, in the consolidated mortgage was subordinate to the lien for common charges which were foreclosed and that his purchase was therefor subject only to the $54,000 “first” mortgage in the consolidated loan. 

Despite the court acknowledging that a consolidation is an “instrument of convenience for the contracting parties only” the court determined, in this case, that the consolidated lien was one lien, not two, for the purposes of New York Real Property Law, section 339-z. The plaintiff’s purchase was subject to the entire consolidated loan, not just the “first” loan.

The court seemed to be concerned that ruling only the “first” mortgage had priority over the common charge lien would negatively affect a condominium unit owner’s ability to refinance. Reasoning that if the court found that only the “first” mortgage was owed, lenders and unit owners would simply take whatever steps were needed to  “satisfy the original mortgage, take out a new mortgage, and pay the additional fees required to achieve precisely the same result” as the court achieved for the lender.

The court left open the possibility that had there been an intervening lien, filed between the time when “first” mortgage was made and the “second” mortgage was made and consolidated, the result may have been different.

Steven Glassberg is the founder of Glassberg & Associates, LLC, New York, N.Y. and Port Washington, N.Y.

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