This is a classic story of “you snooze, you lose”.  A Brooklyn condo board at 442 St. Marks Avenue Condominium fought hard to collect over $88,000 in arrears from a unit owner.  In the end, after a long fight, the board gets to keep $49,000 in a good faith deposit by a purchaser at the foreclosure auction who bought without doing its due diligence (recognizing that there was a prior lien of record which would not be extinguished by the foreclosure; in other words, the buyer was buying the property with the bank’s first mortgage on the property – not a good deal), and then waiting over 6 months to challenge the sale because the condo’s representatives didn’t follow the foreclosure rules.  At least the condo walked away with some money for all its efforts.  The lesson from this case for condos is make sure you follow the rules and sometimes if you don’t, if your adversary snoozes, he may lose so that you win a little.

Under most condo bylaws, boards are vested with the obligation of collecting arrears.  The foreclosure of the common charge lien for the arrears that condos in New York have the power to foreclose, is sometimes meaningless depending on the value of the unit.  If there is a huge first, purchase money mortgage which has priority over the common charge lien then there may not be enough equity in the property to benefit the condo once the first mortgage (or any other prior liens of record) are paid out of the foreclosure proceeds.  If there is a surplus then the condo can go after the surplus from the sale.  It takes time but it can be worth the wait.  If foreclosure of the condo’s common charge lien is not worth the effort because there isn’t enough equity in the property, boards sometimes still foreclose the lien (even if the mortgagee lender before the condo’s lien doesn’t act) because the condo wants to get a new owner in who will start paying common charges prospectively.  Another approach is bringing an action for a money judgment against the unit owner who is not paying.  All of these methods, as well as some others, can be employed by the condo board in order to try to collect the arrears; a job which the board is often required under the condo bylaws to do.

Back to the case of “you snooze, you lose” – Board of Managers of 442 St. Marks Avenue Condominium v. Marc C. Milord. The condo was owed tens of thousands of dollars in common charges, but so was the first mortgage bank that was owed over $300,000.  The first bank forecloses and names the condo in the foreclosure action because it has the right to extinguish the condo’s common charge lien in the foreclosure. That bank transfers the first mortgage lien to another bank and then the foreclosure action is discontinued so the chain of title for the lien can be established by the lawyers.  In the meantime, the condo is still not getting paid its common charges, which are mounting.  The condo decides to start its own foreclosure action knowing that the value at the end to the purchaser at the foreclosure auction would be less because the condo’s foreclosure would not extinguish the first mortgage lien, so the purchaser would be buying the property subject to the first lien of over $300,000.  However, the value of the property was over $700,000, so there would be enough value for the condo to get something out of the foreclosure proceeds, or at least, a new owner who would start paying common charges prospectively.  So the condo continued with the collection effort.

The buyer however made a critical mistake and didn’t do his due diligence to discover the first lien by the bank on the property before he bought at the foreclosure sale, depositing $49,000 as a good faith deposit.  The posting at the auction by the referee (prepared usually by the foreclosing lawyers) didn’t mention the first lien by the bank and when the buyer asked the referee about prior liens of record, with the condo lawyer in earshot, both skirted or ignored the question.  The buyer bought anyway.  

The buyer sat on his rights for over 6 months (another critical mistake) and then fought to vacate the sale and get his deposit back.  The condo fought back and in the end, the Court split the proverbial baby.  The court vacated the sale but also held that even though the rules were violated by the condo and its professional, the buyer should not have waited over 6 months to get its deposit back.  So, in the end, the condo got to keep the $49,000 deposit and hopefully a new owner who will pay its common charges.  Stay tuned for an appeal by the buyer.