Relates to mortgage foreclosure by power of sale

Summary of provisions

This bill adds a new Article 14 to the RPAPL entitled "Foreclosure of mortgages by power of sale." These provisions are virtually the same as the provisions of the previous Article 14, which was originally enacted in 1998, extended in 2001 and 2005, but expired in 2009. This Article will provide an alternative, non-judicial mortgage foreclosure procedure with the following significant provisions:

- the procedure is limited to commercial properties, and generally excludes residential properties including residential condominium units and residential buildings owned by a cooperative apartment corporation; and

- a notice of intention to foreclose must be served upon the mortgagor and all junior lienors by personal service or by certified mail and first class mail; and

- a notice of sale must be served upon the mortgagor and other interested parties at least 30 days before the date of the sale.

The bill contains further provisions governing the conduct of the sale and the rights of various parties in interest, including the distribution of the proceeds of the sale, applications for any surplus, and the pursuit of a deficiency judgment. The bill also provides a mechanism whereby mortgagors and other interested parties can seek to convert the proceeding to a contested judicial proceeding under Article 13 of the RPAPL.

Justification

The most common procedure for foreclosure of a mortgage in New York State is set forth in Article 13 of the Real Property Actions and Proceedings Law. That Article requires judicial action and intervention at many stages of the process, even when the proceeding is uncontested. A referee must be appointed, the referee's report must be approved, and a judgment of foreclosure and sale must be signed and entered. Due to these many procedural requirements and the substantial caseload carried by judges in New York State, the various stages of judicial review can delay such a proceeding, even an uncontested one, to three years or more.

Such a lengthy and costly process has negative impacts on the court system. It also has negative impacts on the lending process and the economy, making credit more costly and more difficult to obtain. Mortgage lending is vital to the State's real estate industry. That

lending, in turn, is underwritten based on the borrower's ability to repay the debt and the creditor's ability to obtain prompt, full repayment in the event of a default. This bill provides a prompt, economical foreclosure remedy, which will encourage lenders to invest in real estate in New York.

The bill makes two significant changes from the version of Article 14 that expired in 2009. First, it eliminates the sunset date so that this nonjudicial option won't suddenly expire when it may be most needed. Second, during research on the previous law, it was discovered that a number of commercial lenders were unable to use the law because title insurance companies would not provide title insurance during the year-long period after foreclosure when a mortgagor could cause a court to reconvey property that had been foreclosed on, even when. the property was sold to an innocent purchaser for value who was neither the mortgagee nor the mortgagee's nominee and without notice of any irregularity. This redemption period also made it difficult for lenders to dispose of foreclosed properties until the one-year period had expired. Because the bill provides ample opportunities for mortgagors to challenge the foreclosure, and even convert the non-judicial process under Article 14 into a judicial process under Article 13, the redemption period is not needed, is counterproductive and is not included in this version of Article 14.

New York has long had a nonjudicial process for commercial mortgage foreclosure. The previous Article 14 was enacted in 1998, and it was preceded by a different Article 14 which also authorized a nonjudicial process. However, this nonjudicial process expired on July 1, 2009. During the twelve years that Chapter 231 of 1998 was in existence, the law provided legal certainty for both commercial mortgagors and mortgagees with regard to their respective rights in commercial foreclosure proceedings. This bill would reestablish a nonjudicial process and authorize a more timely and more economic alternative for uncontested foreclosures.

LEGISLATIVE HISTORY:See 5.7240 of 2012. This bill would essentially reenact into law the previous version of Article 14 RPAPL, which had been enacted by Chapter 231 of 1998, and extended by Chapters 76 of 2001 and 123 of 2005, but which expired on July 1, 2009.

FISCAL IMPLICATIONS:This bill has no direct fiscal impact to the state, but should help reduce the burden and costs on the court system to process these uncontested foreclosures of commercial mortgages.

EFFECTIVE DATE:Immediately, provided however that any proceeding which commenced following the expiration and repeal of the former Article 14 RPAPL on 7/1/09 shall be eligible under this act, pursuant to an agreement of both parties.