Bulletin: NY000082

Date:
April 05, 1995
To:
All New York Counsel, Managers and Agents
RE:
Conflicting Court Decisions Regarding the Impact of Sec. 6501 of the CPLR and the Status of Tenants After a Mortgage Foreclosure.

Dear Associates:

Pursuant to Section 6501 of the New York Civil Practice Law and Rules (CPLR), a person who obtains an interest in real property after the filing of a notice of pendency in an action is bound by the proceedings in that action to the same extent as if he or she had been named as a party. The notice of pendency, or lis pendens, as it may more commonly be called, is an extremely valuable tool in mortgage foreclosure proceedings. As a general rule, a lender, prior to commencing an action to foreclose a mortgage, will run a title search to identify all parties that have an interest in the real property in question, which interest is alleged by the lender to be subject and subordinate to the mortgage. The lender will then name each of the parties having such an interest or encumbrance as a party defendant and serve them with a summons and complaint in the action to cut off their interest in the property. The lender will usually have the search continued down to the date of the filing of the lis pendens just to make sure that no additional parties have to be named as defendants. Any party obtaining an interest in the property after the filing of the lis pendens would take subject to the foreclosure proceeding. Such party would not have to be named in the action, and his or her interest would be cut off by the judgment of foreclosure.

The clear guidelines established by Section 6501 have been clouded a bit by a recent New York Supreme Court decision entitled Green Point Savings Bank v. Defour, 618 NYS 2nd 169 (1994). In that case, the Bank commenced a mortgage foreclosure action against the fee owner and filed a lis pendens in September, 1990. Subsequently, in February 1991, the owner entered into a one year lease with an individual named Berry. Approximately 18 months later, a judgment of foreclosure and sale was entered in favor or the Bank. The tenant, Berry, alleged that the owner never told him about the pending foreclosure proceedings, that neither the judgment nor the caption of the action made any reference to him and that he was never served with a copy of the judgment of foreclosure.

The Bank was the successful bidder at the sale and it sent a notice to vacate to all tenants and occupants of the premises, and subsequently moved for a writ of assistance to have the Sheriff evict Berry and his family.

The Court cited an earlier decision, Green Point Savings Bank v. Leselrod (N.Y. Law Journal 7/31/91 Page 25 Col. 3, N.Y. Supreme Court, Suffolk County) which held that although it was not incumbent upon plaintiff to join a party whose tenancy began after the foreclosure commenced, by failing to do so, the tenant's interest is not affected by the judgment of foreclosure and the purchaser takes title subject to any rights, title or interest the tenant can establish. Following the Leselrod approach, the Court in Defour held that Berry was not a party to the foreclosure action and therefore was not bound by the judgment.

In a more recent case, Astoria Federal Savings & Loan Association v. Probkevitz (N.Y. Law Journal 2/2/95, Page 36, Col. 3, N.Y. Supreme Court, Queens County), a lender commenced a mortgage foreclosure proceeding on 5/3/93 and filed its lis pendens on the same day. Shortly thereafter, the fee owner leased the premises to one Tribble, who, in turn, sublet the premises to 9 subtenants. After judgment of foreclosure and sale was entered, the lender, which was the successful bidder at the sale, commenced an action to remove the tenants from the premises, who refused to surrender possession. In ruling in favor of the lender, the Court confirmed the traditional rule that where a tenancy begins before the filing of a lis pendens, the tenant is a necessary party to the action. But where, as in the Probkevitz case, the tenancy did not commence until after the filing of the lis pendens, the tenants, as well as the subtenants, were bound by the foreclosure proceeding.

When confronted with such a difference of opinion by Courts of equal authority, prudent underwriting dictates that we should proceed with caution. The traditional interpretation of Sec. 6501 of the CPLR, as confirmed by the Probkevitz decision, is, from a title perspective, the correct position. It establishes clear guidelines regarding the persons who are bound by the proceedings in an action. Anyone who is about to obtain or acquire an interest in real property can and should perform a title search to determine what other interests may affect the property in question.

Notwithstanding our analysis of the subject, however, there is a split in the opinion of the Courts. Appropriate title guidelines must be established until such time as the Courts clarify the issue. Accordingly, the standard exception, "rights of tenants, lessees or parties in possession", should not be removed as an exception in any title coming through a mortgage foreclosure proceeding unless it can be established to the satisfaction of Company Counsel that all tenants who were subordinate to the mortgage were joined in the action and that their interests were cut off by the judgment of foreclosure, or the lender delivers an affidavit to the effect that there are no tenants, lessees or parties in possession of the premises. Furthermore, if a lease or memorandum thereof has been recorded, such lease should be specifically excepted unless the tenant was joined as a party defendant and cut off by the judgment of foreclosure and sale, or proof satisfactory to Company Counsel is produced that such lease has expired, been canceled or otherwise of no further force and effect.

Should you have any questions, please contact Company Counsel.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.

References

Bulletins Replaced:
None
Related Bulletins:
None
Underwriting Manual:
11.24 Lis Pendens
 
12.28 Mortgages
Exceptions Manual:
NY Lis Pendens
 
NY Mortgages
Forms:
None