Cannot a foreclosing plaintiff choose who to name as a party defendant in a foreclosure action? In the absence of prejudice to the defaulting property owner, yes, although a recent holding of the Second Department tacitly suggests “no,” but may not have addressed the actual controlling principles. In NYCTL 2012-A Trust v. Phillip, 145 A.D.3d 684, 43 N.Y.S.3d 96 (2d Dept. 2016), the court affirmed denial of an ex parte order of reference on the ground that the plaintiff refrained from serving tenants. This could be a dangerous precedent and can threaten the orderly progress of foreclosure cases in New York, actions already unduly burdened with delays and minefields.

What precisely did the case say, how might the ruling create problems, and what are the maxims urging that the holding may be off the mark?

Essence of the Case

This was a garden variety tax lien foreclosure upon a four-story building with five apartments per floor. Sundry junior lien holders were named as defendants and served, tenants were potentially included as “John Does” but not served, although the required notice to tenants was posted.[1] Upon ex parte application for an order of reference, the Second Department affirmed the trial court's denial, holding that tenants are necessary parties (correct) and although non-joinder can be excused (correct), concluding nonetheless that judicial economy is best served by avoiding “piecemeal litigation… at the outset.”

What distinct litigation was envisioned which would do violence to judicial economy is unclear, certainly not readily discernible. If the court just believed that judicial discretion should not be disturbed, the response urged here is that lack of citation in the ruling to applicable precedent militates against a role for discretion. Recitation of the suggested prevailing maxims and practicalities follows.

Tenants Already Protected

Rent Control or Stabilization. A noteworthy exception to the notion that a tenant is a necessary party defendant in a foreclosure action applies to the tenant benefiting from rent control or rent stabilization statutes. The rule is a creature of both statute [RPAPL § 1303(5)], and case law, the later providing that a judgment of foreclosure cannot abate a tenant's protection given by rent laws.[2] A foreclosure purchaser acquires title subject to the same disabilities which rent laws impose upon owners who acquire title by any other form of conveyance. Consequently, a foreclosure judgment does not deprive a tenant of the protection given by the restraints or eviction contained in emergency rent laws.[3]