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  • Posted on: Nov 18 2022

By Jonathan H. Freiberger

Much has been written in this Blog about mortgage foreclosure actions.  In this Blog’s prior article: “Second Department Addresses Issues Regarding Proof of Value of Foreclosed Property for the Purpose of Calculating Deficiency Judgment Under RPAPL 1371”, we discussed deficiency judgments.  By way of brief background, loans are generally evidenced by a promissory note.  The borrower’s repayment obligations are frequently secured by a mortgage on real property.  In the event of a borrower default, among the choices available to a lender are an action at law, by which the lender sues on the note for monetary damages, or an action in equity to foreclose the mortgage.  [This Blog has addresses the issue of a lender’s election of remedies [here], [here] and [here].]  Generally, RPAPL 1301, prohibits a lender from simultaneously proceeding down both paths.  

Today’s article focusses on aspects of a lender’s efforts to obtain repayment of the borrower’s obligations under the note through foreclosure.  The desired result of a foreclosure action is the foreclosure sale – a public auction at which the subject property is sold by the appointed referee.  If the proceeds of the sale are less than the amount determined by the referee (and awarded to the lender in the judgment of foreclosure and sale) to be due and owing, the lender may be entitled to a deficiency judgment against the borrower.  The historical backdrop of deficiency judgments, and the enactment of RPAPL 1371 to remedy some of the inequity with the law prior thereto, are addressed by the Court of Appeals in Sanders v. Palmer, 68 N.Y.2d 180 (1986).

Among other things, RPAPL 1371 requires that, after a foreclosure sale, when the lender moves to confirm the sale, if one is desired, it must also seek its deficiency judgment.  See RPAPL 1371(2).  A motion for a deficiency judgment, if made, must be made within ninety (90) days “of the consummation of the [foreclosure] sale”.  RPAPL 1371(2).  If no such motion is made “the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.”  RPAPL 1371(3).  

The amount of the deficiency judgment shall be “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.”  RPAPL 1371(2).  

The calculation of a deficiency judgment was the issue decided on November 16, 2022, by the Appellate Division, Second Department, in Rhinebeck Bank v. WA 319 Main, LLC.  In Rhinebeck, the borrower’s property was sold at auction for $795,001.  The amount found to be due and owing to the lender pursuant to the judgment of foreclosure and sale was approximately $1.16 million.  The lender moved for leave to enter a deficiency judgment in the approximate amount of $366,000 and supported its motion with an appraisal of the property that presented a range of values from approximately $620,000 to $1.1 million – the low end of the range being referred to as the “liquidation value”.  The lender urged the supreme court to accept the $620,000 “liquidation value” of the property as the “fair market value” for the purposes of calculating the deficiency judgment.  Because the sale price at auction (approximately $795,000) is higher than the purported fair market value (approximately $620,000) the lender requested that the sale price should be used to calculate the deficiency under RPAPL 1371(2).  Accordingly, the lender argued that the deficiency should be calculated by subtracting the sale price at the public auction ($795,000) from the amount calculated as due and owing by the referee ($1.16 million) for a difference (and deficiency judgment) of approximately $365,000.  Supreme court agreed and entered a deficiency judgment in that amount in favor of the lender.  The borrower appealed.

The Appellate Division modified the supreme court’s order finding that it was error to base the deficiency judgment calculation on the “liquidation value” from the appraisal report.  Instead, the supreme court found that the upper range value of approximately $1.1 million should have been used.  In so doing the Court stated:

It is the lender who bears the initial burden of demonstrating, prima facie, the property’s fair market value as of the date of the auction sale.  When a lender moves to secure a deficiency judgment against a borrower, the court shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid on at auction or such nearest earlier date as there shall have been any market value thereof.

Here, to the extent that the Supreme Court, in effect, determined that the estimated liquidation value of $620,000 reflected the fair and reasonable market value of the property, this was error. A property’s market value is defined as the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell. “Fair market value” means neither panic value, auction value, speculative value, nor a value fixed by depressed or inflated prices. Here, the record does not support a finding that the estimated liquidation value of $620,000 constituted the fair and reasonable market value of the property at the time of the foreclosure sale. Rather, the record supports a determination that the higher estimated value of $1,060,000 presented by the plaintiff’s appraiser constituted the fair and reasonable market value of the property at the time of the foreclosure sale. As this value is higher than the auction price for the property, the deficiency judgment must be calculated as the difference between the amount of the indebtedness on the mortgage and $1,060,000 (see RPAPL 1371[1]). Accordingly, we modify the order so as to grant that branch of the [lender]’s motion which was for leave to enter a deficiency judgment against [the borrower] to the extent of granting the plaintiff leave to enter a deficiency judgment against [the borrower] in the sum of $104,186.56.  [Citations, internal quotation marks, ellipses and brackets omitted.] 

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.

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