Second Department Addresses Issues Regarding Proof of Value of Foreclosed Property for the Purpose of Calculating Deficiency Judgment Under RPAPL 1371

• Posted on: Sep 20 2021

By Jonathan H. Freiberger 

Mortgages are commonly delivered to lenders as security for the repayment of financial obligations, which, in many cases, are evidenced by promissory notes.  If borrower defaults, lender can sue on the note or foreclose the mortgage, but not both simultaneously.  See RPAPL 1301.  [Eds. Note: this Blog has addressed a lender’s election of remedies [here] and [here].]  When real property is sold at a foreclosure sale, the court appointed referee distributes the proceeds of sale pursuant to the judgment of foreclosure and sale (“JFS”) and statute.  See, e.g., RPAPL 1354(1), (2) and (3).  Among other things, the proceeds of sale may be used to pay outstanding taxes or other assessments that are liens on the subject property, certain expenses of sale, subordinate mortgagees and, of course, the sums due to the lender, with interest.  See, e.g., RPAPL 1354(1), (2) and (3).

When proceeds of the sale exceed that which must be distributed pursuant to the JFS and statute, any surplus monies are “paid into court” (see RPAPL 1354(4)) for distribution pursuant to surplus money proceedings and may go to subordinate mortgagors, borrower’s creditors and/or individuals or entities with liens on the foreclosed property, among others.  

Sometimes, however, the proceeds of a foreclosure sale are insufficient to satisfy borrower’s obligations to lender.  In such cases where a deficiency may result, the Court may issue a deficiency judgment pursuant to RPAPL 1371(1).

Prior to the enactment of RPAPL 1371, deficiency judgments were calculated using the sale price at auction.  The problem with such an analysis became apparent during the Great Depression.  As the Court of Appeals noted in Sanders v. Palmer, 68 N.Y.2d 180 (1986):

That purpose was materially expanded and changed as a result of the depression of the early 1930s. In his message to the extraordinary session of the Legislature proposing enactment of relief for mortgage debtors, which ultimately became the Laws of 1933 (ch. 794), Governor Herbert H. Lehman stated:

“It is evident that the State will have to intervene to prevent to some extent the hardships now being occasioned by foreclosures of mortgages on homes and farms. Owing to the current depression, thousands of our citizens who have invested their life savings in individual homes now find themselves faced with the prospect of having these homes taken from them.

“The hardship has been seriously aggravated by reason of the fact that upon foreclosure sales, deficiency judgments have been entered against home owners entirely out of line with the fair value of the property….

…I am of the definite opinion that an end must be made of the present system of obtaining exaggerated deficiency judgments. A deficiency judgment should bear some definite relation to the real value of the property, rather than to the price established at the forced auction sale….”

Sanders, 68 N.Y.2d at 184.  

Accordingly, RPAPL 1371(2) provides that the “deficiency judgment shall be for an amount equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee’s fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher.”

A motion for a deficiency judgment must be made within ninety days of the delivery of the deed to the purchaser at the foreclosure sale.  See RPAPL 1371(2).  Importantly, the motion “shall be served personally or in such other manner as the court may direct.”  See RPAPL 1371(2).  

With respect to an RPAPL 1371 analysis, “[t]he mortgagee has the initial burden to make a prima facie showing of the fair market value of the property as of the foreclosure sale date and whether the mortgagee meets that initial burden presents a factual question for the court to resolve based on the entire record.”  Flushing Sav. Bank, FSB v. Bitar, 106 A.D.3d 690, 690-91 (2013) (citations and internal quotation marks omitted).  In Flushing, the Court affirmed the denial of lender’s motion for leave to enter a deficiency judgment due to its failure to meet its burden regarding the value of the property.  The Court found the conclusory opinion of a licensed real estate appraiser without an appraisal report to be insufficient to establish value, particularly “in light of the large discrepancy between the appraised value and the relatively low sale price at the foreclosure sale”.  Flushing, 106 A.D.3d at 691.

Similar issues were addressed by the Second Department on September 15, 2021, in U.S. Bank v. 199-02 Linden Blvd. Realty, LLC.  Subsequent to a foreclosure sale, lender in U.S. Bank moved to confirm the referee’s report of sale and “to determine the fair market value of the mortgaged premises as of the date of sale, and for leave to enter a deficiency judgment against the defendants….”  In opposition, defendants argued that insufficient proof of the value of the property was submitted as of the date of the sale.  In response, lender “argued that in the event the Supreme Court found that it failed to demonstrate, prima facie, the fair market value of the property as of the date of auction, rather than denying [lender’s] motion outright, the court must permit [lender] an opportunity to submit additional proof as to valuation.”  The motion was denied due to lender’s failure to meet its burden “of demonstrating the fair market value of the mortgaged premises as of the date of sale.”  Lender filed a notice of appeal and moved in supreme court for reargument.  The Second Department explained that, upon reargument, supreme court:

adhered to its determination … denying, without a hearing, those branches of [lender’s] motion which were to confirm the referee’s report of sale of the mortgaged premises, to determine the fair market value of the mortgaged premises as of the date of sale, and for leave to enter a deficiency judgment against … defendants …. However, the court, upon reargument, in effect, vacated so much of the order … as denied that branch of [lender’s] motion which was, in effect, in the alternative, for a hearing to determine the fair market value of the mortgaged premises as of the date of sale, and thereupon granted that branch of the motion.

The Second Department recognized that “RPAPL 1371 does not require the court to hold an evidentiary hearing; however, where a triable issue as to the reasonable market value is presented, that issue should not be decided upon affidavits, but by the court or a referee, so that the witnesses may be subject to observation and cross-examination.”  (Citations and internal quotation marks omitted.)  The Court then found that lender’s submissions were insufficient to meet its burden, and that supreme court, on reargument, corrected its error in failing to permit lender to submit additional proof of value and, in so doing, stated:

Here, contrary to [lender’s] contention, its submissions were insufficient to meet its burden of establishing that it was entitled to a deficiency judgment. [Lender’s] submissions, which included evidence of the auction price in the amount of $450,000, as well as an appraisal indicating that the property had an estimated market value of the same amount, were insufficient to satisfy its burden of demonstrating, prima facie, the property’s fair market value as of the date of the auction sale  The appraisal submitted by [lender] was not certified, nor was it accompanied by an affidavit of the appraiser. Moreover, the appraisal stated that the value indicated by the income approach was in the amount of $450,000, while the value indicated by the sales comparison approach was in the amount of $480,000. There was no explanation as to why the Supreme Court should accept the value based on the income approach as opposed to the sales comparison approach. Moreover, the part of the appraisal report that discussed the income approach is incomplete, and the part of the appraisal report that discussed the sales comparison approach is completely omitted from the record. Therefore, the court properly determined that [lender] failed to meet its burden of demonstrating, prima facie, the property’s fair market value as of the date of the auction sale. While the court improperly denied [lender’s] motion outright without permitting it to submit additional proof, that error was later corrected, when, upon reargument, the court granted [lender] a hearing to determine the property’s fair market value as of the date of the auction sale.

When, and if, the fair market value of the property is established, that amount will be subtracted from the amount determined to be due and owing to lender in the JFS to arrive at the amount of the deficiency. 

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.