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  • Posted on: Aug 7 2020

Generally, when a loan is made by a lender that is secured by real property, two of the documents delivered to the Lender by the borrower are a promissory note (which evidences the obligation to repay the borrowed sums) and a mortgage (which secures the obligation to repay the note by giving the lender a security interest in real property).  If a loan secured by a mortgage goes into default and the lender decides to protect its rights through litigation, a choice must be made whether to sue on the note and attempt to collect money damages, or foreclose on the mortgage and have the property sold at foreclosure to fully or partially satisfy the underlying obligation.  See, e.g., Wells Fargo Bank, N.A. v. Goans, 136 A.D.3d 709 (2nd Dep’t 2016) (“Where a creditor holds both a debt instrument and a mortgage which is given to secure the debt, the creditor may elect either to sue at law to recover on the debt, or to sue in equity to foreclose on the mortgage”).  This choice, called an election of remedies, is mandated by section 1301 of the Real Property Actions and Proceedings Law (“RPAPL”), which provides:

1. Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff of the county where he resides, if he resides within the state, or if he resides without the state, to the sheriff of the county where the judgment-roll is filed; and has been returned wholly or partly unsatisfied.

2. The complaint shall state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected.

3. While the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.

This Blog has previously addressed RPAPL § 1301 [HERE] and [HERE].

The purpose of RPAPL § 1301 is to “shield the mortgagor from the expense and annoyance of two independent actions at the same time with reference to the same debt” and, “consistent with the legislative purpose of the statute to avoid inappropriate duplicative and vexatious litigation by the same party.”  Central Trust Co. v. Dann, 85 N.Y.2d 767, 772 (1995) (citations, internal quotation marks and emphasis omitted).  Because RPAPL § 1301 “is in derogation of a plaintiff’s common-law right to pursue the alternate remedies of foreclosure and recovery of the debt at the same time,” there is a judicial recognition that the statute “should be strictly construed.”  Old Republic Nat. Title Ins. Co. v. Conlin, 129 A.D.3d 804 (2nd Dep’t 2015) (citations and internal quotation marks omitted).  In Old Republic, however, the Court permitted an action on a note to proceed despite the pendency of a foreclosure action because while the “foreclosure action was not formally discontinued, the effective abandonment of that action is a de facto discontinuance” which militates against dismissal of the present action pursuant to RPAPL 1301(3).”  Old Republic, 129 A.D.3d at 805 (citations omitted).  The Old Republic Court found that “[a]llowing the plaintiff to pursue this action on the note, which was commenced more than four years after the foreclosure action was effectively abandoned, is not inconsistent with the purpose of RPAPL 1301(3) ….” Id.

In Stone Mountain Holdings, LLC v. Spitzer, decided by the Appellate Division, Second Department, on August 5, 2020 (“Stone Mountain II”), the Court affirmed the grant of leave to a lender pursuant to RPAPL § 1303 to commence an action on the underlying promissory note after a judgment of foreclosure and sale was issued in a prior foreclosure action.  While the facts relative to RPAPL § 1303 are set forth herein, the more convoluted and interesting facts of that case are set forth in an earlier opinion of the Second Department.  Stone Mountain Holdings, LLC v. Spitzer, 119 A.D.3d 548 (2014) (“Stone Mountain I”).  The Stone Mountain borrowers borrowed $3,000,000 on behalf of their company.  The loan was evidenced by a promissory note and was secured by unconditional personal guaranties from the owners of the company.  As additional security, one of the owners and his wife delivered to the lender a mortgage on their residence.  

The borrowers defaulted on the loan in 2008, lender commenced a mortgage foreclosure action in 2009 and obtained a judgment of foreclosure and sale in the amount of $4,320,000 in 2010.  “However, rather than proceeding with the foreclosure sale of the … residence, the plaintiff agreed to forgo its right to foreclose on the residential mortgage in exchange for a partial payment of $100,000 against the judgment.”  Stone Mountain II at *1 (citation omitted).  “In the course of its attempts to collect the $4.22 million still owed, the plaintiff discovered that the judgment in its favor authorized only the foreclosure sale and did not authorize it to collect sums due but not satisfied by the sale of the mortgaged property.” Id.  Accordingly, lender sought leave to commence a new action against borrowers to collect the remaining debt because “after final judgment in its favor, a plaintiff may not commence another action to recover a mortgage debt without leave of court.”  Stone Mountain II at *2 (citing to RPAPL § 1303(3) and other cases).

In granting leave to lender to pursue the remainder of the debt in excess of $4,000,000, the Court prevented the borrowers from obtaining a windfall and stated:

Here, as we noted in our prior decision in this matter [Stone Mountain I], to prevent the plaintiff from seeking to collect the $4.22 million still owed to it would “create a windfall for the defendants by allowing them to obtain satisfaction of the judgment by paying roughly 3.3% of the principal sum borrowed and less than 2.4% of the judgment” (Stone Mtn. Holdings, LLC v Spitzer, 119 AD3d at 550). Accordingly, the Supreme Court providently exercised its discretion in granting the plaintiff’s motion for leave to commence a new action to collect the remainder of the debt (see TD Bank, N.A. v 250 Jackson Ave., LLC, 137 AD3d 1006, 1007; see generally Valley Sav. Bank v Rose, 228 AD2d 666, 667).

Stone Mountain II at *2

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