6820 Ridge Realty LLC v. Goldman

• Citation: 701 N.Y.S.2d 69,263 A.D.2d 22
• Parties: 1999 N.Y. Slip Op. 9838 6820 RIDGE REALTY LLC, et al., appellants, v. Steven GOLDMAN, et al., defendants, Stephen Baumgarten, et al., respondents.
• Decision Date: 22 November 1999
• Court: New York Supreme Court — Appellate Division

Page 69

701 N.Y.S.2d 69

1999 N.Y. Slip Op. 9838

6820 RIDGE REALTY LLC, et al., appellants, v. Steven GOLDMAN, et al., defendants, Stephen Baumgarten, et al., respondents.

Supreme Court, Appellate Division, Second Department, New York.

Nov. 22, 1999.

Zeichner Ellman & Krause, New York, N.Y. (Nathan Schwed of counsel), for appellants.

Borah, Goldstein, Altschuler & Schwartz, P.C., New York, N.Y. (Jeffrey R. Metz and Steven L. Schultz of counsel), for respondents.

DAVID S. RITTER, J.P., GABRIEL M. KRAUSMAN, ANITA R. FLORIO and SANDRA J. FEUERSTEIN, JJ.

KRAUSMAN, J.

The primary issue we are asked to determine is whether the owners of an apartment building purchased at a foreclosure sale may maintain an action for strict foreclosure action pursuant to RPAPL 1352 to cut off the leasehold rights of commercial tenants who were not joined as defendants in the original foreclosure suit. For the reasons which follow, we conclude that an action for strict foreclosure may be maintained to extinguish a commercial tenant's possessory interest in real property, and that the plaintiffs in this action are entitled to a judgment in their favor against the defendant tenants.

The relevant facts underlying this action are undisputed. In the spring of 1990, the defendants Steven Goldman, Elliot Lederman, Stephen Baumgarten, and Sushiel Samant entered into a contract to lease a ground-floor apartment in a cooperative apartment building located at 2301 Ocean Avenue in Brooklyn. Under the terms of the contract, the defendants, who are doctors, were required to pay the cooperative corporation $220,000 in exchange for a long term professional lease which would entitle them to use the leased apartment as a medical office.

On November 1, 1990, the defendant doctors executed a lease which gave them the right to occupy the ground-floor apartment for an initial period of 40 years, at a rent which would be the same as if 121 shares had been allocated to the unit. Under this formula, the rent was initially calculated to be $625.57 per month for the apartment. The lease expressly provided that it would be "subject to all present and future ground or underlying leases and to any mortgages now or hereafter liens upon such leases or on the land and building * * * and to any and all extensions, modifications, consolidations, renewals and replacements thereof".

In April 1993 the cooperative corporation defaulted on its obligation to make mortgage payments to the Apple Bank for Savings, which held a first mortgage on the premises, leaving a balance due under the mortgage of over $2,500,000. In the fall of 1993, Apple Bank commenced a foreclosure action against several parties, including the cooperative corporation, a commercial tenant, and a number of "John Doe" tenants with possessory interests in the premises. However, the doctors were not named as defendants or served with process in the foreclosure action. On July 1, 1996, the Supreme Court, Kings County (Shaw, J.), entered a judgment of foreclosure and sale in favor of Apple Bank. The judgment directed that all named defendants be "forever barred and foreclosed of all right, claim, lien, title, interest and equity of redemption in the said mortgaged premises". The judgment further directed that the premises be sold subject to "the rights of tenants or persons in possession of the subject premises".

At a foreclosure sale on August 15, 1996, Apple Bank successfully bid $2,500,000 to purchase the property. After making the successful bid, the bank assigned its right to purchase the property to the plaintiffs, 6820 Ridge Realty LLC and 564 Associates LLC. A referee's deed was subsequently delivered to the plaintiffs on November 22, 1996. On that date, the court-appointed receiver also notified all tenants in the apartment building that their landlord's interest in the premises had been transferred to the plaintiffs, and that all payments due under their leases should be made to them. However, the plaintiffs refused to accept rent from the doctors for their medical office.

One year later, in November 1997, the plaintiffs commenced this strict foreclosure action against the doctors in order to extinguish their right of redemption and possessory interest in the premises. Only two of the doctors, Stephen Baumgarten and Sushiel Samant, answered the complaint. In their answer, Baumgarten and Samant asserted a counterclaim for a judgment declaring that the foreclosure sale had not extinguished their right to remain in possession pursuant to their lease.

In May 1998 the answering defendants Baumgarten and Samant moved, inter alia, to dismiss the complaint for failure to state a cause of action, and for summary judgment on their counterclaim. In support of the motion, they argued that their right to rent their apartment had not been terminated by foreclosure of the Apple Bank mortgage because they were not joined as defendants in that action, and the judgment itself directed that the premises be sold subject to the existing rights of tenants in possession.

The plaintiffs countered by cross-moving, inter alia, for summary judgment in their favor. Although the plaintiffs conceded that the defendants' leasehold rights had not been terminated by the original foreclosure action, they maintained that they were entitled to bring a strict foreclosure action to cut off a possessory interest in the premises which was subordinate to their ownership interest.

The Supreme Court dismissed the action against all four defendant doctors, and awarded the moving defendants summary judgment on their counterclaim. In reaching its determination, the court found that since the doctors had not been named as defendants in the foreclosure action, the plaintiff purchasers took title subject to their possessory interest as tenants. The court further concluded that the plaintiffs could not "succeed upon a theory of strict foreclosure or reforeclosure as such an action may only properly be commenced against lien holders as opposed to parties with mere possessory rights in the subject premises as is the case at bar". The court's finding that a strict foreclosure or reforeclosure action could be brought only against a lienholder was based upon a New York County Supreme Court case, Vendome Commercial LLC v. 57th Street Video and Photo (N.Y.L.J., Dec. 14, 1996, at 26, col. 1). The court also explained that it had dismissed the action against the two doctors who had failed to appear, Steven Goldman and Elliot Lederman, since they were united in interest with the moving defendants.

On appeal, the plaintiffs contend that the Supreme Court erred in holding that a strict foreclosure action may not be brought against a commercial tenant with a possessory interest in real property.

We begin our analysis by examining RPAPL 1311, which requires the plaintiff in a mortgage foreclosure action to join, as a party defendant, any person "whose interest is claimed to be subject and subordinate to the plaintiff's lien". Under the statute, these necessary parties include "[e]very person having an estate or interest in possession * * * in the property as a tenant in fee", as well as all junior lienholders (see, RPAPL 1311 ). Thus, tenants are clearly necessary parties to a foreclosure action (see, Polish Nat. Alliance v. White Eagle Hall Co., 98 A.D.2d 400, 404, 470 N.Y.S.2d 642; Flushing Sav. Bank v. CCN Realty Corp., 73 A.D.2d 945, 424 N.Y.S.2d 27). The rationale for joinder of tenants and junior lienholders "derives from the underlying objective of foreclosure actions--to extinguish the rights of redemption of all those who have a subordinate interest in the property and to vest complete title in the purchaser at the judicial sale" (Polish Nat. Alliance v. White Eagle Hall Co., supra, at 404, 470 N.Y.S.2d 642).

The absence of a necessary party in a foreclosure action leaves that party's rights unaffected by the judgment and sale, and the foreclosure sale may be considered void as to the omitted party (see, Polish Nat. Alliance v. White Eagle Hall Co., supra, at 406, 470 N.Y.S.2d 642; see also, Marine Midland Bank v. Freedom Rd. Realty Assocs., 203 A.D.2d 538, 611 N.Y.S.2d 34). Accordingly, a tenant in possession pursuant to a lease which is subordinate to the mortgage, but who was not made a party to the foreclosure action, cannot be dispossessed by the purchaser at the foreclosure sale (see, 3 Bergman, New York Mortgage Foreclosures § 33.04 ). However, in such cases, the purchaser of the foreclosed property has two potential remedies--the commencement of a strict foreclosure action pursuant to RPAPL 1352, or a reforeclosure action pursuant to RPAPL 1503.

In the case at bar, the plaintiff purchasers opted to commence a strict foreclosure action pursuant to RPAPL 1352. This provision authorizes the court to issue a judgment that fixes a time period within which any person having a right of redemption or right to foreclose a subordinate lien must act to redeem or begin a foreclosure action. If the person having a right of redemption or subordinate lien fails to redeem the property or commence a foreclosure action within the time period fixed by the court, such person "shall be excluded from claiming any title or interest in such property and all title or interest of such person * * * shall thereby be extinguished and terminated" (RPAPL 1352). Since RPAPL 1352 operates to "dispose of the encumbrances of those whose interests were junior at the time of the original foreclosure but who were not joined as parties to that action", a judgment of strict foreclosure "cures a defect in the judgment or sale under the first foreclosure" (3 Bergman, New York Mortgage Foreclosures § 32.03).

The terms "strict foreclosure" and "reforeclosure" are often used interchangeably, and like a strict foreclosure action, a reforeclosure action results in a judgment which gives a junior lienor or encumbrancer a specific time period in which to exercise the...