Shadow Docketing In Mortgage Foreclosure Actions and Effects on Condominium Common Charge Liens

“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.[1]  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.

The Court agreed that the bank’s delays were extensive and unacceptable, regardless of whether the “inaction was due to a desire to accrue substantial interest on a valuable property or for more benign reasons.”  Id. at *1.  The Court declined to set a deadline by which a lender is required to prosecute an unopposed foreclosure action, but noted that the bank in this instance failed to provide any justification for its lengthy delays.  Ultimately, the bank was precluded from collecting approximately $100,000 of accrued interest that the Court found attributable to the bank’s failure to timely pursue its foreclosure action.  Thus, the Citimortgage opinion demonstrates that a lender’s failure to timely prosecute a foreclosure case (regardless of the lender’s intent) is sufficient grounds for reducing interest that accrues while the case remains dormant.

Although the Citimortgage Court did not create a standard by which a lender must prosecute a foreclosure action, the decision indicates a growing intolerance for the practice of shadow docketing.

[1] RPAPL Section 339-z provides, in pertinent part, that “[t]he board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all other liens except … all sums unpaid on a first mortgage of record….  Upon the sale of conveyance of a unit, such unpaid common charges shall be paid out of the sale proceeds or by the grantee.”  This means that in a foreclosure action in New York, a bank that holds a first mortgage of record against the premises recovers first as senior lien holder.  A condominium association holding a common charge lien, however, retains priority over other liens under statute to the extent there are proceeds remaining after first mortgage is satisfied.

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