The Foreclosure Process: Risks & Opportunities

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Mike Grinthal, TakeRoot Justice

How It Starts

Mortgage-holder files a summons and complaint in Supreme Court, Commercial Division, in same borough as building

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Defendants:

• Owner(s)
• Anyone else with an interest in the building:
• City agencies (DOF, HPD, ECB, etc.)
• Other mortgage-holders
• Tenants (usually named as Doe’s)

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Notice to Tenants

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Must be posted in public area of building

Researching Court Cases

NY State Courts Electronic Filing (NYSCEF) system https://iapps.courts.state.ny.us/nyscef/HomePage

• Requires creating an account https://iapps.courts.state.ny.us/nyscef/CreateAccountNew
• Search cases by index number or name
• Scans of most court papers in a case

E-Courts https://iapps.courts.state.ny.us/webcivil/ecourtsMain

• No account needed
• Searchable by index number or name
• Court dates, judges

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Answer

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Any named party, INCLUDING TENANTS, can answer and appear

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Tenants usually don’t raise defenses, since there are no claims against them, but can raise counterclaims and bring facts to the court’s attention, such as conditions in the building.

Request for Judicial Intervention (RJI)

• Form filed by any party - including tenants - asking for the case to be assigned to a judge
• Nothing happens until RJI is filed
• Sometimes plaintiff delays, and cases sit in limbo - “shadow docket”

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Notice of Pendency

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• Plaintiff files with county clerk
• Notifies any potential buyer that foreclosure action is pending

Appointment of Receiver

How it happens:

• Party makes motion
• Usually plaintiff but ANY party can - including tenants
• Owner can oppose
• Judge picks from list of approved receivers (including some nonprofits)
• Receiver gives tenants written notice including a copy of court order, contact info, and instructions for paying rent

Owner may say “Keep paying rent to me”

Scammers may pop up with their own demands

KEEP PAYING RENT TO THE OWNER UNTIL YOU SEE THE COURT ORDER

THEN PAY ONLY TO THE RECEIVER

What Does a Receiver Do?

Stands in for landlord

• Collects rent, renews leases, brings eviction cases, and makes repairs as possible from the rent roll

Works for the court

• Reports activities and expenses to the judge
• Gets paid out of the sale of the building
• Can’t be sued (e.g. HP action) without permission of foreclosure judge

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Most receivers are just management companies -

in other words, LANDLORDS

How a Receiver Affects Strategy

Change in TARGETS

• Building owner no longer has power
• Receiver makes day-to-day decisions
• Foreclosure judge has power to actively supervise the receiver, but has to be pushed
• Mortgage-holder is the only actor that has any money

Change in TACTICS

• Receiver is not affected by a rent strike - they’re paid by the court, regardless of how much rent is collected
• All legal tactics must happen within the foreclosure case

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Getting Money for Repairs (Part I)

“Milbank motion”

• Motion asking the judge to order the mortgage-holder to deposit money for the receiver to use for repairs
• Judge has discretion to grant or not, and how much money to order
• Mortgage-holder gets reimbursed from the sale price of the building

History:

In 2009, Milbank Real Estate defaulted on mortgages for 10 Bronx buildings. Buildings were in such bad shape, receiver couldn’t collect enough rent to make needed repairs. Judge granted tenants’ motion ordering the lender, Wells Fargo, to deposit $2.5M for repairs.

Getting Money for Repairs (Part II)

warning - legalese ahead

In 2021, legislature amended RPAPL 1307:

• “A plaintiff who commences a mortgage foreclosure action . . . that is abandoned by the mortgagor but occupied by a tenant . . . SHALL maintain such property until such time as ownership has been transferred”
• Building is “abandoned” if
• “plaintiff receives a complaint from a tenant . . . indicating that the owner of the residential property has ceased maintaining the property, AND”
• the plaintiff posts a notice on the building and the owner doesn’t reply in 1 week
• BUT “a plaintiff shall be relieved of its responsibilities to maintain the residential real property that is the subject of a foreclosure action for the period that a receiver of such property is serving”

Judgment of Foreclosure

Usually plaintiff moves for “summary judgment,” asking the judge to rule without a trial because there is no real factual dispute

Order of Reference

Judge appoints a REFEREE to calculate how much the owner owes =

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unpaid mortgage principal + interest + costs of litigation + payment of receiver

+ money used from Milbank motion

Sale of Building

After 21 days’ notice, building is sold at auction at the courthouse.

From sale proceeds, payment is made in this order:

1. Court/receiver
2. Mortgage-holder
3. Other mortgages
4. Other debts (e.g. tax arrears, HPD civil penalties, tenant claims) in order of age of debt
5. Whatever’s left goes to owner

What Happens to Tenants After Sale?

• Rent-regulated tenancies - UNAFFECTED

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• Federally-subsidized tenancies (Section 8, LIHTC, etc.) - UNAFFECTED

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• Good Cause - COVERAGE MAY CHANGE based on # of new owner’s units

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• Unregulated leases
• If started before foreclosure case - STILL VALID until expiration
• If started during foreclosure case - CANCELLED

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• Month-to-month tenants & other occupants - CAN BE EVICTED after 90 days notice

What if the Owner Files for Bankruptcy?

AUTOMATIC STAY of all (non-criminal) court cases against owner, and no new cases can be filed

• Foreclosure case is frozen
• Receiver loses authority & control goes back to owner

BUT

Bankruptcy court appoints a TRUSTEE to manage owner’s assets

A trustee is like a receiver, but can also sell building

Q & A