Setting Aside a Judicial Sale
Print Article- Posted on: Jan 27 2023
Regular readers of this Blog know that we spend a good deal of time writing about mortgage foreclosure. The anticipated conclusion of a mortgage foreclosure action is a foreclosure sale. The judicial sale is also the hoped-for conclusion of other types of proceedings – such as mechanic’s lien foreclosures and condominium lien foreclosures.
Once conducted, there are mechanisms to set aside judicial sales when warranted. “[E]ven after a judicial sale to a good faith purchaser” a court can exercise its “inherent power over a sale made pursuant to its judgment or decree to ensure that it is not made the instrument of injustice.” Altshuler Shaham Provident Funds, Ltd. v. GML Tower LLC, 129 A.D.3d 1439, 1442 (4th Dep’t 2015) (citations and internal quotation marks omitted). See also, Nationstar Mortgage, LLC. V. Crute, 187 A.D.3d 1028, 1029 (2nd Dep’t 2020) (citations and internal quotation marks omitted). However, such “power should be exercised sparingly and with great caution, a court of equity may set aside its own judicial sale upon grounds otherwise insufficient to confer an absolute legal right to a resale in order to relieve [a party] of oppressive or unfair conduct.” Id. (citations and internal quotation marks omitted).
Court’s may exercise their discretion where “fraud, mistake, exploitive overreaching, misconduct, irregularity or collusion casts suspicion on the fairness of the sale.” Id. (citations and internal quotation marks omitted). See also Emigrant Mortgage Co., Inc. v. Hartman, 173 A.D.3d 975, 976 (2nd Dep’t 2019) (citations omitted); Nationstar Mortgage, 187 A.D.3d at 1030. Courts may also exercise their inherent powers based on sufficiency of price, but only when “the price is so inadequate as to shock the conscience.” Polish Nat. Alliance of Brooklyn, U.S.A. v. White Eagle Hall Co., Inc., 98 A.D.2d 400, 407 (citations omitted) (“This rule rests on sound public policy criteria because in most instances the market value of the property will exceed the winning bid and to upset sales based on mere inadequacy of price would discourage bidding and unduly frustrate the rights of mortgagees to enforce their contracts.”). See also Altshuler, 129 A.D.3d at 1442.
In addition to the court’s inherent powers, there are statutory bases for setting aside a judicial sale. Among them are CPLR 2003 and RPAPL 231(6). CPLR 2003 provides that “[a]t any time within one year after a sale made pursuant to a judgment or order, but not thereafter, the court, upon such terms as may be just, may set the sale aside for a failure to comply with the requirements of the civil practice law and rules as to the notice, time or manner of such sale, if a substantial right of a party was prejudiced by the defect….” Similarly, RPAPL 231(6) provides that “[a]t any time within one year after the sale, but not thereafter, the court, upon such terms as may be just, may set the sale aside for failure to comply with the provisions of this section as to the notice, time or manner of such sale if a substantial right of a party was prejudiced by the defect.”
The Court in Board of Managers of the 442 St. Marks Avenue Condo. v. Milord, decided on January 25, 2023, addressed a challenge to a judicial sale. The defendant, unit owner/mortgagor, borrowed a sum of money which was secured by a mortgage (the “Mortgage”) on his condominium unit. Subsequently, plaintiff, condominium board (the “Board” or “Plaintiff”), recorded a lien for unpaid common charges and related fees. The Board commenced an action to foreclose its lien. Supreme court entered a judgment of foreclosure and sale pursuant to which the condominium unit was sold for $490,000. A $49,000 deposit was delivered to the referee at the sale by the high bidder (the “Buyer”). The Buyer’s title search in anticipation of closing revealed the existence of the Mortgage. The Buyer intervened in the action and sought the vacatur of the sale and the return of the deposit. Buyer argued that the failure to disclose the existence of the Mortgage “violated principals of equity in addition to the Auction Rules of Kings County.” Supreme court set aside the sale but directed that the deposit be delivered to the Board. Buyer appealed so much of supreme court’s order as directed that the deposit be delivered to the Board.
The Second Department reversed. The Court found that “[b]y setting aside the subject sale, the Supreme Court, in effect, determined that the Board’s failure to disclose the senior mortgage held by [lender] cast suspicion on the fairness of the sale.” (Citations and internal quotation marks omitted.) Accordingly, supreme court should have directed that the deposit be returned to the Buyer. The deposit should not have been delivered to the Board because the Buyer had a “lawful excuse for refusing to perform the contract.” (Citations and internal quotation marks omitted.)
Finally, as to the Board’s claim that the sale should not be vacated due to the Buyer’s unilateral mistake, the Court stated:
The plaintiff’s contention that the intervenor’s belief that it had purchased the property free from the senior mortgage was the result of the intervenor’s own unilateral mistake is without merit, as the record shows that the plaintiff failed to disclose the existence of the senior mortgage in the complaint, the judgment of foreclosure of sale, or the terms of sale (see SRP 2012-4, LLC v Darkwah, 198 AD3d at 939-940). Likewise, the plaintiff’s claim that the intervenor failed to exercise due diligence is without merit since, inter alia, “‘[t]he rule that a buyer must protect himself [or herself] against undisclosed defects does not apply in all strictness to a purchaser at a judicial sale'” (id. at 940, quoting Lane v Chantilly Corp., 251 NY 435, 438). A sale of property “‘in the haste and confusion of an auction room is not governed by the strict rules applicable to formal contracts made with deliberation after ample opportunity to investigate and inquire'” (SRP 2012-4, LLC v Darkwah, 198 AD3d at 940, quoting Sohns v Beavis, 200 NY 268, 271-272).
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.
