Paula Chin: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Paula Chin with Habitat, the New York City magazine for co-op and condo board directors. My guest is Michelle Quinn, a partner at the law firm Gallet Dreyer & Berkey. Condo boards face particular challenges when it comes to foreclosing on unit owners who fail to pay common charges, especially when it comes to their bottom line. And for those that are mired in a procedure that seems to be going on and on, there are steps they can do and they don't just have to sit on their hands, which is what Michelle is here to talk about today.
Michelle, let's talk about the background in terms of, what are the problems that they typically run into, and what is their process for trying to address them?
Michelle quinn: So in a condominium where a unit owner is actually the owner of their unit, they have an issued deed. They get a mortgage from a bank, usually to help with the purchase price.
The condominium is paid common charges, which represent the cost for the building to run its operations. And represents a certain percentage interest that the condominium unit owner has in the total amount of the building itself, the condominium association building itself. Where a unit owner becomes delinquent in the payment of those common charges the typical thing that a condominium building does is to file a common charge lien.
The common charge lien is filed with the city register and basically holds the place in line of their, as a creditor of that eventual, if you will, sale of either the apartment or any other kind of payment above any other one that might file a lien later in time after them. So it's a, it's really a placeholder in a lot of respects.
But condominium associations also can file a lien foreclosure action if the amount gets to such a sum that it becomes obvious that the unit owner cannot become current. And a lot of times, especially if there are common charges that are very old, if you know they're just not paying.
It's a, it's more than just a few months, it becomes obviously a habitual issue. It's likely that unit owner is also not paying their mortgage to their bank, and that's really where the condominium association needs to pay attention. The issue becomes that a condominium association is not quick to bring a common charge lien, foreclosure action to recover or to sell the property, the unit, because oftentimes the amount of the common charge lien is fairly small in the scheme of things. 'cause typically common charges are a lot lower than, say, a monthly maintenance charge in a condominium, in a cooperative. So it can be cost prohibitive to bring a common charge lien foreclosure when you're only owed say, $10,000, and the value of the property is $500,000. And then you're having to go through the whole process, spending attorney's fees and doing the foreclosure when you're only going to get back your $10,000. Add to that, the fact that the lender, the bank who gave the mortgage for the unit owner to purchase the apartment, they have priority over any of the proceeds or any of the equity in that sale.
So if the unit owner say, borrowed $400,000 to purchase their apartment. And the condominium is owed the $10,000, but now the property is only worth $300,000 just because of the downturn in the economy or what have you, the bank is going to be made whole first. Even if it's the condominium that brings the foreclosure action, or if the unit owner is in default of their mortgage payments, the bank will bring a mortgage foreclosure action and, but the, again, the bank will be paid first.
So whatever amount of that mortgage, that's gonna be satisfied from the equity initially, in addition to any interest that has accrued on that mortgage. And that's where it becomes an issue.
Paula Chin: So what, if you could lay out a situation? So let's, as you say, there, there's a, an action. The value of the unit has gone down.
If in fact it was sold,, everything would go to the mortgage lender. So the condo is left in the hole. What can it do?
Michelle quinn: So there are two things that can happen. I have two, a couple of instances cases that we have where the common charge lien was filed by the condominium association.
The unit owner became delinquent in their common in their mortgage payments and the bank commenced a mortgage foreclosure proceeding named, the condominium association. And for whatever reason, for a variety of reasons, I should say, the bank has been very slow in pursuing the action.
Now, some of the reasons are legitimate, meaning in one instance, the unit owner filed for bankruptcy, which stays all actions until the determination of a bankruptcy. Because obviously the unit would be an asset of the debtor and have to be determined by the bankruptcy court who gets what amount.
That in my particular case, that bankruptcy was dismissed and the bankruptcy only took about a year, given that it was dismissed. So there wasn't any, having, did not really play out where a lot of bankruptcies can take years and years to, to determine. But aside from that-- and then in another case that I have, a bank brought a foreclosure action and their claim for the extensive delay in finally getting to a sale was that they were trying to do, trying to work out loss mitigation or basically restitution from the unit owner where the unit owner would, who would pay what's owed, not the full amount of the mortgage, but become current on the mortgage payments, plus some penalty or late fees or interest that to the satisfaction of the bank where they basically reinstate the mortgage and then everybody goes along. But that generally doesn't take eight years, which in this case is how long. One case was started in 2009, and one case was started in 2014, and these are in different banks.
So these cases have been pending for a decade, essentially, with interest accruing for the bank. So the bank doesn't have a large incentive to move quickly because they are going to be paid first. Yet the condominium association, which is junior, is sitting there saying but I am not being paid my common charges.
I have my common charge lien and there's nothing that I can do. But there is.
So there's a couple of remedies, especially where it appears that a bank has not actively pursued a case, where they've just sat on their hands and just blown it off, said eventually we'll get paid and we'll get our interest, et cetera.
If a unit owner is in common charge arrears, and you've even gotten to the point where the condominium association files a common charge lien, that should now be on their radar that they should be looking at court dockets and checking with the Secretary of State to see if an action has been commenced by the bank against the unit owner. Because then the condominium association can take an active role in that foreclosure to make sure that the bank is actively pursuing it.
If it finds that it's years and years are going by and there's still no sale and there's still nothing that has happened, like a bankruptcy, like a death, like a something, the person goes to jail or something along those lines, which would legitimately stay the proceeding. The condominium association could then file a motion with the court and say, look, they're not pursuing it.
They at least should not get, it would toll the calculation of the interest that's accruing. There's a CPLR section essentially that says where the bank is seeking to get interest, it should be in, in the discretion of the court whether or not to give interest for a particular period of time.
If you can show between this date and this date, they didn't do anything and there was no impediment for them to do something, then they shouldn't be allowed to accrue the interest for that period of time. Because what happens is if you add the principle plus the interest, plus this added time, delay, and interest accruing for that.
Then there's less and less chance that the condominium's common charge lien is going to be paid. So the condominium will end up with a whole lot of nothing because the bank has not actively pursued the action. So they're not fast, but they shouldn't be really slow.
Paula Chin: Michelle, let me just be sure I understand.
What a condo board does not want is a, if this case is dragging on and on, for the interest that the unit owner owns the bank to keep accruing. And the reason they don't want that is because that means more debt for the unit owner and less likely money for the condo. Is that right? Okay. And so if they file this with with the court, what might happen?
Michelle quinn: It's a, it is a tall standard. You do have to demonstrate that the bank acted improperly or dilatory conduct, et cetera. But it also brings that to the court's attention that there hasn't been a notice of foreclosure sale.
Like why, what is the problem? Why is the bank not pursuing the sale? And really brings it back before the court to get the court to say, you need to do the sale by this date. Now it may not decrease or toll the amount of interest. They may say no, they had these other reasons why, and it's really not so bad that it entitles you to decrease the amount of interest that accrued. However, it does stop the bleeding, so to speak, that if then the unit is sold and maybe the condo doesn't get made whole, but then you get in a purchaser who will start paying their common charges and you're not waiting around and your common charges are accruing and the interest is accruing, and we're all just waiting indefinitely for something to happen, which the only person that has the control of that is the bank, but not so much.
Paula Chin: So it's a form of not quite leverage, but basically to perhaps get the court to nudge the bank and get things moving. And no matter what the outcome is in terms of getting, stopping the interest accrual to get the bank moving no matter what will be in, in a board's favor.
Michelle quinn: Exactly. Now the board does have other, there are another couple of options for the board, not just doing either a common charge lien foreclosure, or participating in the bank's mortgage foreclosure. That condominium also has a contract with the unit owner, the, in the form of the bylaws. And can bring a breach of contract action against the unit owner for a money judgment.
It does not have to involve the real property, the condominium unit itself. You can seek a money judgment against the condominium unit owner separately for the failure to pay the common charges, and then that money judgment, which is good for 20 years. You can garnish wages, seize other property, you know what in any other kind of money judgment enforcement, you would be able to do. It's not limited to just, oh, the bank has foreclosed and the unit is sold and now I don't get any money. You have other options. Or in some cases they are paying their mortgage, they're just not paying the common charges. So if the condominium association doesn't want to go down the foreclosure route because this is a nice person and I know he lost his job and I just need to make sure that I have a judgment that I can get paid over time. You can enter into a payment plan. But you just, the condominium board has to pay attention to those unit owners who are in arrears more than just, what's the bottom line of our finances? We don't have the income that we thought we were gonna have because these 10 unit owners are in arrears.
What are we gonna do about the arrears? So the other thing is that if the unit owner rents their apartment out, which in a condominium you're entitled to do, then you can send a notice to the tenant asking them to pay whatever rent they were paying to the unit owner. They can pay, they should pay to the condominium association until the arrears are brought current.
That is an advantage because frequently the rent that's being paid by the tenant is covering both the common charges and the unit owner's mortgage. So is in a lot of cases, much more than the monthly common charges. So it'll be paid down much faster because, so for example, if your common charges are only $750 a month, but the unit owners charging their tenant $1,500 a month to rent the apartment, the tenant would then pay the condominium association $1,500 a month.
And then those arrears would get paid down much more quickly. So the tenant in some cases, become very concerned because they're not paying their landlord, et cetera. But it is a defense in all non-payment proceeding if the landlord unit owner brings a case against their tenant for not paying the rent, the tenant can say but I got this notice from the condominium association that the unit owner wasn't paying their common charges. So I've been paying the condominium association directly, and that is a defense to any non-payment proceeding. They would not be able to be evicted because they paid the condo and not their unit owner.
Paula Chin: So it seems the bottom line is there are strategies that boards can use and they don't have to just get stuck in a foreclosure procedure that is just dragging on and on.
Michelle quinn: Exactly. It's just a matter of a board needing to pay attention among the other myriad issues that face boards in condominiums and in cooperatives. You do have to be a little diligent when you see that there's a unit owner who's in trouble.
Paula Chin: Michelle, this has been really informative. Thank you so much for joining us.
Michelle quinn: Absolutely. My pleasure.