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One More Election To Give You A Headache

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  • Posted on: Nov 3 2017

Mortgages on real property are typically delivered to a lender to secure loans evidenced by promissory notes.  When a default occurs under the note and/or mortgage litigation frequently follows.  If the borrower and/or guarantor are solvent, the lender may choose to sue on the note for monetary damages in an action at law.  If the property is valuable, but the borrower has insufficient funds to satisfy a money judgment the lender might decide to sue to foreclose the mortgage in an equitable action.  Generally, however, a lender who made a mortgage loan in New York cannot do both and must make an election of remedies pursuant to section 1301 of New York’s Real Property Actions and Proceedings Law.  RPAPL §1301 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.

The election of remedies provision of the RPAPL was one of the issues decided in Agility Funding, LLC v. Wilmington Trust National Association (Sup. Ct. Warren Co. October 11, 2017).  The plaintiff in Agility claimed to have a mortgage on the property subject to foreclosure and defendant Wilmington was the record owner of the subject property and took title from Parkside Development Partners, LLC subject to the plaintiff’s mortgage and note.  Plaintiff moved for an order, inter alia, appointing a referee to compute the amounts due to it under the note and mortgage. Wilmington, who never answered the complaint, cross-moved to: (1) vacate its default due to law office failure; (2) dismiss the complaint on a variety of grounds; and, (3) cancel the lis pendens.

In opposition to Wilmington’s cross-motion, plaintiff submitted an affidavit that, for reasons not explained, set forth factual circumstances surrounding a prior action commenced by plaintiff on the underlying note in which a judgment was obtained, but that “no property executions were served because plaintiff was unable to identify any assets available for execution and, therefore, no sheriff has ever returned to plaintiff a property executed [sic] unsatisfied”. For the first time at oral argument, however, Wilmington argued that the cross-motion should be deemed amended to seek dismissal of the foreclosure complaint pursuant to the election of remedies principles set forth in RPAPL 1301.  The court permitted the parties to submit supplemental briefs on this issue.

The Agility court, inter alia, dismissed the plaintiff’s complaint, with prejudice, and as to the RPAPL 1301 argument, stated:

In the case at bar, in commencing the foreclosure action, plaintiff elected to pursue its remedy at law and obtain a judgment on the mortgage debt (the note) first, before it commenced this action to foreclose the mortgage securing that same note.  Plaintiff admits that it secured judgments against Parkside [Development Partners, LLC] and the guarantors in that action to recover the mortgage debt and that no property executions were served and returned unsatisfied.  As such, this action is barred by RPAPL 1301[1] and the complaint must be dismissed [citations omitted].

The Agility court denied, as academic, much of the remaining requests for relief in the underlying motion and cross-motion.

TAKEAWAY

There are numerous reasons why a lender may choose to pursue an action on the note as opposed to a mortgage foreclosure, and may include:

  1. the borrower and/or guarantors have sufficient funds to satisfy a money judgment;
  2. the real property subject to the mortgage has title issues, environmental issues, is of insufficient value to make the lender whole and/or may present other issues that make foreclosure seem impractical;
  3. the statutory requirements for foreclosures, particularly with respect to residential real property, can be onerous;
  4. it may be quicker and less expensive to bring an action at law on the note and/or guaranty.

If for whatever reason, a decision is made to proceed on the note in the first instance and a judgment is obtained against the maker of the note and/or any guarantors, take such steps as may be necessary to attempt to collect on any such judgment because a subsequent foreclosure action can be dismissed as in Agility.

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