A new development in real estate acquisitions from distressed homeowners involves investors approaching homeowners in foreclosure and offering to purchase the deed from the owner/mortgagor. After purchasing the deeds, investors have then chosen to litigate with the foreclosing banks on the merits of the mortgage in the hopes of settling for a lesser amount than the amount due or having the case dismissed which may result in the accelerated debt deemed time barred and the mortgage unenforceable. A recent decision in the Appellate Division, Second Department, Citimortgage v. Etienne, 2019 NY Slip Op 03564 (2d Dep't 2019) shows the limits of the ability of a subsequent owner attempting to assert defenses personal to the original owner/mortgagor in a pending foreclosure proceeding. The decision is instructive to remind practitioners regarding “personal defenses” and standing of other parties to appeal decisions.

In Etienne, the borrower executed a promissory note in favor of the bank in 2009 which was secured by a mortgage against a property in Kings County. Default occurred in 2010. In November 2012, the borrower transferred title to the subject property to the defendant OKL Property Corp. The bank filed a foreclosure against the borrower and OKL in 2012. The borrower filed an answer denying the allegation in the complaint and asserted several defenses, including lack of standing and failure to comply with the notice requirements in RPAPL 1304. OKL filed an answer asserting that it was the record owner of the premises and asserted that the plaintiff lacked standing to commence the action as their second affirmative defense. Etienne, at 1 and 2.

The plaintiff moved for summary judgment and an order of reference. The former owner and borrower on the note, Etienne, did not oppose the plaintiff's motion. The subsequent owner, OKL, opposed the plaintiff's motion and cross-moved for summary judgment dismissing the complaint on the grounds that the plaintiff lacked standing to commence the proceeding as well as that plaintiff failed to comply with the notice requirements of RPAPL 1304. In an order issued in May 2016, the court granted the plaintiff's motion for summary judgment and an order of reference and denied OKL's cross motion. OKL appealed the judgment. Etienne, at 2.

The Second Department affirmed the trial court's decision and order on every ground asserted, beginning with the branch of the appeal by OKL contesting the branch of the grant of summary judgment against the former owner/borrower. Citing Stimmel v. Stimmel, “[r]elief on an appeal may not, as a general rule, be granted to a non-appealing party.” 163 A.D.2d at 383. This is a common issue for real estate investors who take title to premises encumbered by a defaulted mortgage and then seek to vacate orders which have granted summary judgment against the prior owner. The court also reiterated the corollary to this concept by citing Hecht v City of New York, 60 N.Y.2d 57, that “an appellate court's source of review with respect to an appellant, once an appeal has been taken, is generally limited to those parts of the judgment [or order] that have been appealed and that aggrieve the appealing party.” 60 N.Y.2d at 62. As the award of summary judgment against the former homeowner and in favor of the plaintiff/lender did not “aggrieve” OKL as the subsequent purchaser, the court dismissed the portion of OKL's appeal which sought to vacate the judgment against the prior owner. Etienne, at 2.

The Second Department acknowledged that OKL has properly asserted standing as a defense to the foreclosure in its answer as well as raising arguments in opposition timely made to the motion for summary judgment. Etienne, at 2. The court conducted an analysis of the proof provided by the plaintiff in affidavit form, as well as exhibits in its motion, that the note was in possession prior to commencing the action based on the guidelines set forth in, inter alia, Aurora Loan Servicing v. Taylor, 25 N.Y.3d 355 and CPLR 4518[a], and affirmed the trial court's finding that the plaintiff did in fact have standing to commence the proceeding.

The opinion reiterated that OKL acknowledged that the premises was purchased subject to the mortgage in question and title was subordinate to the lender's interest; however, the court was careful to note that the former owner was the only signatory on the note and mortgage. Although the court, citing PHH Mtge. v. Davis, 111 A.D.3d 1110, acknowledged OKL was a proper party to the proceeding as it was subject to the mortgage lien and its rights in the property could be cut off in the default in the mortgage, the decision went on to state “it does not necessarily follow that OKL may properly assert, either in its own right or behalf of a borrower, any defense that could have been asserted by borrowers.” Etienne, at 3.

The Second Department elaborated further by stating that “the notice provisions of RPAPL 1304 were enacted for the benefit and protection of borrowers who were 'natural persons' … . the statutory defense created by RPAPL 1302 (2) for noncompliance with RPAPL 1304 is a “personal defense” which could not be raised by OKL, a stranger to the note and underlying mortgage.” Etienne, at 3 (citations omitted).

This decision is instructive to remind practitioners that the mere act of transferring a deed subject to a mortgage in default may result in the subsequent purchaser estopped from raising personal defenses which would otherwise delay or even prevent a lender from foreclosing on the property if they were asserted by the homeowner/borrower. Prospective purchasers of distressed real estate reviewing court filings may be disappointed to discover that the seemingly flawed filings which make a property an attractive arbitrage play are not so flawed after all.

Jaime Lathrop is the principal of the Law Offices of Jaime Lathrop, PC, located in Greenwood Heights, Brooklyn, and was the former Director of the Residential Foreclosure Unit of the Brooklyn Bar Association Volunteer Lawyers Project Inc. from 2009 to 2014.