RPAPL 1501(4) and the Mortgagee in Possession Doctrine

• Posted on: Apr 11 2025

By: Jonathan H. Freiberger

Today’s article addresses a property owner’s right to cancel a recorded mortgage pursuant to RPAPL 1501(4)[1] and whether a mortgagee is “is entitled to recover sums expended to preserve and maintain an allegedly abandoned property under equitable and quasi-contractual theories.”

As discussed in prior articles, mortgages on real property are frequently delivered to lenders to stand as security for the repayment obligations evidenced by a promissory note. A recorded mortgage, however, is an encumbrance on real property. Accordingly, if it is possible to cancel a recorded mortgage it is likely in the interest of the mortgagor and/or property owner to do so. RPAPL 1501(4) provides a mechanism to cancel a mortgage of record in situations where the six-year statute of limitations for the commencement of an action to foreclose such mortgage has expired.[2]

On April 9, 2025, the Appellate Division, Second Department, in a lengthy opinion, decided Auquilla v. Villa, a case that addressed some interesting issues related to RPAPL 1501(4) and a mortgagee’s right to collect sums expended to preserve and maintain “an allegedly abandoned property.” The facts of Auqulla, which have been simplified for editorial purposes are set forth herein. In 2005, the borrower delivered a note to the lender and the repayment obligations were secured by a mortgage on real property located in Ossining, New York (the “Property”). “By bargain and sale deed dated March 8, 2006, the borrower retained a one-third interest in the premises for herself and conveyed the remaining interest to the plaintiffs, Miguel Auquilla and Hilda Guzman (hereinafter together the owners), as tenants in common.” In 2010, after the borrower and the owners defaulted in their repayment obligations, the lender commenced a mortgage foreclosure action (the “First Action”).[3] The First Action was dismissed in 2013 pursuant to CPLR 3216 for neglect to prosecute.

In 2014, the lender commenced a new foreclosure action against the borrower and the owners (the “Second Action”). The owners answered but the borrower defaulted. Subsequently, the motion court granted the owners’ motion on their cross-claim for a declaration that “the owners had sole title to the [P]roperty” – a holding that was not challenged on appeal. Subsequently, the lender was granted summary judgment by an order that directed it to move for a judgment of foreclosure and sale within three months, but the Second Action was dismissed when the lender failed to comply with the order.

The Owners’ Claims Under RPAPL 1501(4) and The Lender’s “Mortgagee in Possession” Claim

Thereafter, the owners commenced an action against the borrower and the lender to, inter alia, cancel and discharge the mortgage of record pursuant to RPAPL 1501(4) (the “Third Action”). “The [lender] interposed an answer [in the Thid Action] by which it asserted, inter alia, counterclaims alleging unjust enrichment, to recover in quantum meruit, and for the imposition of an equitable lien and an equitable mortgage against the [P]roperty. The [lender] claimed, among other things, that the owners abandoned the [P]roperty and, as a result, the [lender] was ‘forced to protect its interest in the [P]roperty for the duration of the default.’ The [lender] alleged that it advanced funds for the payment of property taxes, property insurance, property preservation fees, and other charges and costs, and sought to recover those funds.” (Internal bracket omitted.) The owners moved for summary judgment on their claims under RPAPL 1501(4) and to dismiss the lender’s counterclaims and the lender cross-moved to dismiss the complaint. The motion court granted the owner’s motion for summary judgment as related to RPAPL 1501(4) and denied the lender’s cross-motion but declined to dismiss the lender’s counterclaims. Both the lender and the owners appealed.

The Second Department, after discussing issues related to the applicable statute of limitations, found that the lender’s claim was time-barred, and, thus, the owners’ motion for summary judgment on their RPAPL 1501(4) claim was properly granted, because:

the record reveals, and the [lender] does not dispute, that an action to foreclose the mortgage was commenced in 2010 by the [lender] and the complaint therein was dismissed for neglect to prosecute. The commencement of the [First A]ction accelerated the debt and the limitations clock began to run at that time. Although the [lender] also commenced an action to foreclose the mortgage in 2014, the [Second A]ction was also dismissed. As the instant action was commenced more than six years after the acceleration of the debt in the [First A]ction, and any new action to foreclose the mortgage is time-barred, the owners are entitled to cancellation of the mortgage. [Citations omitted.]

The Court also rejected the Lender’s argument that the statute of limitations failed to run against it because it was a “mortgagee in possession of the [P]roperty.” Quoting LaPlacav. Schell, 68 A.D.3d 1478, 1479 (3^rd Dep’t 2009), the Court noted that the statute of limitations does not run against a mortgagee in possession on the theory that “‘the mortgagor’s acquiescence to that possession is a continuing acknowledgment of the debt.’” Whether a mortgagee is a “mortgagee in possession” for statute of limitations tolling purposes “requires an analysis of whether the mortgagee took full possession of the property pursuant to an agreement with the mortgagor.” (Citation and internal quotation marks omitted.) Taking possession “means acquiring the benefits of possession, including the value of use, rents, and profits, as well as assuming all the legal duties and obligations that flow from possession.” (Citation and internal quotation marks omitted.)

Here, while the loan documents permitted the lender to enter the Property if abandoned, it was not required to do so. The Court found that the lender did not have full possession of the Property. The Court noted that the lender’s own property inspection reports indicated that the Property was “owner occupied” and that the Property “was in good overall condition”. Further, no evidence was submitted that the lender ever “entered the [P]roperty to maintain it or to make repairs.” The Court also found that paying property taxes and insurance “alone is insufficient to establish the mortgagee’s status as a mortgagee in possession.”

The Lender’s Quasi Contract Counterclaims

The Court also rejected the Lender’s counterclaims that it was entitled to recoup the funds it expended “to preserve and maintain the [P]roperty after the owners allegedly abandoned it.” The Court recognized that “a quasi-contractual obligation is one imposed by law where there has been no agreement or expression of assent, by word or act, on the part of either party involved. The law creates it, regardless of the intention of the parties, to assure a just and equitable result.” (Citation and internal quotation marks omitted.)[4] The lender argued that because the written agreement is between the lender and the borrower, there is no written agreement with the owners and, accordingly, quasi-contractual theories of recovery are available to it. This argument was rejected by the Court when it found that “the mortgage agreement, which encumbered the property before the owners took possession and included some terms contained in the note for purposes of, inter alia, events of default, governs this dispute.” The finding that the mortgage controls the dispute was “fatal to the [lender’s]counterclaims sounding in quasi contract.”

The Court noted that “[s]ince it is undisputed that the mortgage agreement governed the [lender]’s right to pay the costs associated with the maintenance of the property after the owners allegedly abandoned it and failed to keep their promise to pay property taxes, the [lender]’s recourse was to proceed pursuant to its rights as contained within the mortgage agreement and, thus, the [lender] was precluded from recovering on its unjust enrichment and quantum meruit counterclaims.” (Citations omitted.)

In establishing a definitive rule related to this issue in light of the lender’s “novel” theory, the Court stated:

The mortgagee’s theory that the mortgage agreement does not govern the dispute since it was executed by the borrower and not by the owners is a novel one in this Court, but is ultimately unpersuasive. Although this Court has not explicitly recognized such a rule in this context, we now hold that there can be no quasi contract claim by a mortgagee against a third-party nonsignatory owner of property encumbered by a mortgage, the terms of which covers the subject matter of the dispute. The Court of Appeals has stated that “[i]t is impermissible . . . to seek damages in an action sounding in quasi contract where the suing party has fully performed on a valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties” (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d at 389). Although the Court of Appeals has not considered whether that rule applies to nonsignatories of a mortgage agreement, it is nonetheless well settled that a contract cannot be implied in fact where there is an express contract covering the subject matter involved. [Some citations, internal quotation marks and brackets omitted.]

The Court went on to fully analyze this issue.[5]

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] This BLOG has written numerous articles addressing RPAPL 1501(4). To find such articles, please see the BLOG tile on our website and type “RPAPL 1501(4)” into the “search” box.

[2] This BLOG has written dozens of articles addressing statute of limitations issues in residential mortgage foreclosure actions. To find such articles, To find such articles, please see the BLOG tile on our website and type “statute of limitations mortgage foreclosure” into the “search” box. For a concise explanation of the inter relationship between the statute of limitations, acceleration and the Foreclosure Abuse Prevention Act (“FAPA”) see, e.g., [here].

[3] This BLOG has written dozens of articles addressing numerous aspects of residential mortgage foreclosure. To find such articles, please see the BLOG tile on our website and search for any foreclosure, or other commercial litigation, issue that may be of interest you.

[4] This BLOG has written numerous articles addressing unjust enrichment, quantum meruit and quasi-contract theories. To find such articles, please see the BLOG tile on our website and type any or all of those terms into the “search” box.

[5] The Court also analyzed and rejected the lender’s claim that it was entitled to an equitable mortgage on the Property as well as an equitable lien.