Daily Development for Monday, December 18, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; PRIORITY: Under statute providing that a condominium liens shall have priority over all prior liens except (inter alia) "all sums unpaid on a first mortgage of record," has no priority over any part of a mortgage that secures debts from a prior first mortgage and second mortgage that were consolidated at a time when no condominium liens were outstanding.

Greenpoint Bank v. ElBasary, 711 N.Y.S.2d 275 (Sup. 2000). (Sup. 2000).

In 1997, Debtor consolidated into a single security instrument a $175,000 first mortgage and $75,000 second mortgage on his condominium unit. At that time, there were $16,000 in unpaid condominium association charges outstanding, constituting a lien against the unit, and the parties caused those liens to be satisfied. The consolidation agreement Thereafter, however, Debtor made no payments on the mortgages and a new group of condominium charges fell due, resulting in $18,000 in liens.

In the foreclosure of the consolidated mortgage, the condominium association argued that the loan should be bifurcated into that portion relating to the earlier first lien mortgage and that portion added from the earlier second lien mortgage. It claimed priority over that portion attributable to the second lien mortgage. It argued that this was the approach most true to the intent of the statute.

The court, finding this issue to one of first impression, in New York, concluded otherwise. It found that the mortgage should be treated as a unitary security for a unitary debt, and, because of the statutory language, that debt is a "first mortgage of record" and therefore entitled to priority in toto over the condominium liens.

The court found it relevant to cite to language in the consolidation agreement to butress its conclusion that the new mortgage was a single first mortgage:

"By signing this Agreement, Lender and I are combining into one set of rights and obligations all of the promises and agreements stated in the Notes and Mortgages including any earlier agreements which combined or extended rights and obligations under any of the Notes and Mortgages. This means that all of Lender's rights in the Property are combined so that under the law Lender has one mortgage and I have one loan obligation which I will pay as provided in this Agreement."

The court also emphasized that the debt had been treated as one debt by the lender and that payments were scheduled and interest accrued on a consolidated debt.

The condominium association argued that there was no evidence that the second mortgage that had been consolidated with the first was a purchase money mortgage, and therefore the sums it represented did not fit within the statutory purpose in exempting first line mortgages from the normal statutory priority rule for first lien mortgages. The court, however, responded that if the legislature had intended that only purchase money liens would fit within the exemption, it knew how to say so.

Comment: The fundamental purpose of prioritizing later arising liens for condominium charges against mortgage liens recorded before the condominium assessements arise is that all lenders, including those subordinated, benefit from a stable economic base for the maintenance, insurance and other expenses associated with the building infrastructure. What a given lender loses in subordination with regard to one unit, it gains in protection of the value of all condominium units in which it has an interest, possibly even including the unit as to which the dispute arises. The rationale for exempting first lien mortgages likely is purely political the institutional holders of such mortgages, most of them beginning as purchase money lenders, got to the legislature and convinced it that their priority protection was just this side of apple pie, and that without it they would not lend at attractive rates on condominium units.

Modern residential lending is characterized by regular refinancing practices as mortgage interest rates go through their cycles, and consequently it is not unusual to have refinancing loans that consolidate other loans with the original purchase money loan. In the editor's view, it is precisely this phenomena that the legislature had in mind when providing for an exemption for all first lien mortgages and not just for purchase money mortgages. Such mortgages are an important source of consumer capital and the lenders convinced the legislature that the taps would shut down if the refinancing mortgages lost their priority. Consequently, the editor concludes that the court got it right for better or worse, this is probably what the legislature intended.

Comment 2: The editor notes, however, that the legislature probably did not choose wisely, as it has vastly expanded the opportunity for consumer debt to get ahead of condominium liens, to the ultimate disadvantage of lenders and condominium residents alike.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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