Richard Siegler and Dale Degenshein in Legal/Financial on April 29, 2014
Amtrust Bank holds a "consolidated mortgage," covering three residential units and a commercial garage, in that Upper West Side condominium. The borrower was the sponsor who converted the building to a condominium. When the sponsor defaulted on the mortgage in 2009, the condo board sought to foreclose and, thus, collect the sponsor's arrears.
Under New York State's Condominium Act, if the bank could show it holds a valid "first mortgage" on a property, then the bank is first in line to collect after a foreclosure sale. The board, of course, wants to be first to collect because there may not be any money left after the bank is paid.
On September 14, 2007, Amtrust — which was closed by the FDIC in December 2009 and subsequently absorbed by New York Community Bank — made a loan to the sponsor. This "first mortgage of record" (a phrase that was key to the bank's arguments) had been consolidated with three other mortgages. The board challenged, among other things, whether the consolidated mortgages all constituted the first mortgage.
Since the Condominium Act doesn't define the term, the court looked to a 1936 case and determined that the first mortgage of record was simply the earliest recorded mortgage. The court rejected the board's claim that the term used in the statute was ambiguous. The court also did not believe it needed to rely on federal statutes for the definition of "first lien," a point of dispute between the board and the bank.
Furthermore, the board of managers claimed that the condo bylaws invalidated the first-mortgage status because they allowed only unit-owners to obtain a mortgage — and the sponsor was not a unit-owner covered by this provision. But the court found that the term "unit-owner" did not exclude the sponsor, and there were several provisions of the bylaws supporting this idea. Also, logically, if the sponsor were not a unit-owner, then the board would not be able to collect common charges because, as the court pointed out, only unit-owners are required to pay common charges.
The bottom line? The board's lien came in second, and, because it was a first mortgage of record, the bank's mortgage took precedence.
So why is this case important? The Condominium Act is clear that a valid first mortgage has priority over a common-charge lien. It is highly significant if condominiums can limit the amount the bank is allowed to collect in a first position. Although this has always been an issue, we are seeing more and more cases where boards are looking for ways to challenge a lender's apparent right to receive — before any other creditor is paid — all money claimed under the mortgage. Individual condominium units may be heavily mortgaged.
When you add interest at the "default rate" under the mortgage, there may be little if anything left for the condominium. Therefore, if they can get some — if not all — of the money before the bank does, then that's a big deal.
Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.
Illustration by Liza Donnelly. Click to enlarge
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