“Shadow docketing” is the practice of filing a foreclosure action but waiting years to file an RJI, thus delaying court involvement that would otherwise move the case forward. Because of the priority structure in New York foreclosure proceedings (explained below), and because bank lenders recover not just the full outstanding amount of the first lien, but also any accrued interest, banks are incentivized to delay the prosecution and ultimately the sale of the unit to allow elevated default interest rates to accumulate. Shadow docketing, however, creates a substantial conflict where a condominium board also seeks to recover unpaid common charges.
In a New York foreclosure proceeding, normally the priority of liens is determined by the chronology of recording. However, the New York Condominium Act provides that a condominium board’s lien for unpaid common charges has priority over all other liens, except for a first mortgage of record that predates the common charge lien. In the event of a foreclosure sale, the bank holding the first mortgage, as senior lien holder, recovers first. Bank lenders also receive all interest that has accrued on the mortgage before other lienors or creditors are paid. If there are excess proceeds after the first mortgage is satisfied, the condominium association retains a prior lien against such proceeds. If there are no excess proceeds, the condominium’s subordinate lien is extinguished. Unfortunately, foreclosure proceeds are frequently insufficient to cover the amounts owing to both the bank and the condominium association. Shadow docketing further decreases the likelihood that a condominium association will recover on its common charge lien because substantial interest is allowed to accrue on the mortgage while the case remains dormant.
This practice has been the subject of several recent court decisions. Most recently, the New York Supreme Court reduced the accrued interest owed to a lender because of the lender’s extensive and unexplained delays. In Citimortgage, Inc. v. Gueye, 52 Misc.3d 1203(A), 2016 WL 3450850 (Sup. Ct. N.Y. Co. 2016), the bank commenced a foreclosure action, but then waited more than three and one half years to file an RJI. In fact, the Court noted that the action “dragged on for over seven years despite the fact that the borrower has never appeared.” Id. at *1. After the bank made an unopposed motion seeking a judgment of foreclosure and sale, the condominium board of managers cross-moved seeking to reduce and/or extinguish the accrued interest on the mortgage. The condominium argued that the bank’s seven year delay in prosecuting the foreclosure action should preclude it from recovering interest. This delay, the condominium argued, prejudice it by reducing the chances that it might recover the outstanding common charges. Id.