Condominium and homeowners association Boards are often named as defendants and served with a summons and complaint when the holder of a first mortgage on a unit at the community association commences a foreclosure action against a unit owner. Boards typically don’t understand why they have been served and may, particularly where there are no common charges due, simply file or throw the papers away. This is a mistake.
First, Boards should understand why they are defendants in foreclosure action. Boards are served because they are or may be lien holders and, in order to extinguish the rights of a lien holder in a foreclosure sale, the lien holder must be named as a defendant and served with the papers. In the event a first mortgage holder fails to do so, a community association can claim, after a foreclosure sale, that the unit was transferred subject to outstanding common charges, and that both the seller and buyer at such sale remain liable for their payment and, more importantly, that any outstanding common charges constituted a lien on the unit at the time of the foreclosure sale and that such lien was not extinguished.
Equally important, Boards should know what to do when they are served with foreclosure papers. Irrespective of whether or not common charges are owed at the time the action is commenced, since a foreclosure action is likely to take a year or more, there is a good chance common charges will be due by the time a foreclosure action has been concluded. If a Board does not respond in any manner to a foreclosure action in which it is a defendant, it will not be able to effectively monitor the progress of that action, will not be able to attend any court conferences and, most importantly, will not be able to participate in surplus money proceedings in the event the action proceeds to a foreclosure sale and the sale generates money in excess of that due the holder of the first mortgage. On the other hand, having counsel file a Notice of Appearance in the foreclosure action – at minimal expense – enables the Board to do all of these things and increases the likelihood that any outstanding common charges can be collected.
In some cases, first mortgage holders, aware of a common charge lien, will pay the unit owner’s delinquency and seek to recover any expenditure itself in the context of the foreclosure action. Further, under current New York rules, there is a mandatory settlement conference between the bank and the unit owner in the foreclosure action. Attendance by community association counsel at such a conference can lead to valuable information about the financial condition of the unit owner which may be helpful in deciding the best course of any collection action by the Board. Further, if the foreclosure action is to be resolved, common charge delinquencies may be resolved simultaneously. It is not in the interests of the first mortgage holder or the delinquent unit owner to settle one foreclosure action, only to have to deal with another one soon thereafter commenced by the Board.
Finally, a Board that has filed a Notice of Appearance in a foreclosure action will be aware immediately when the action has resulted in a foreclosure sale, resulting in a new unit owner. The new unit owner, often the bank holding the first mortgage, becomes responsible for common charges accruing after the sale, and should be billed immediately. Further if the sale generated a sum greater than what is owed the first mortgage holder, a Board that has filed a Notice of Appearance can participate in proceedings to obtain that money to satisfy outstanding common charges. A Board that has failed to do so will see that money split among other creditors.