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Appeals Court Affirms That Second Lender’s Mortgage Had Priority Over an Earlier Mortgage That Was Discharged and Later Reinstated

A first recorded mortgage ordinarily has priority over a subsequently recorded one, but exceptional circumstances can occasionally dictate a different result, as occurred in Bank of New York v. Terrapin Industries LLC, 2020 N.Y. App. Div. LEXIS 7887, 2020 N.Y. Slip Op. 07705 (1st Dep’t Dec. 22, 2020).

Bank of New York (the “Bank”) commenced a foreclosure action in 2008. It moved for summary judgment of foreclosure, but withdrew that motion in January 2009 and failed to pursue the action for three years. In March 2012, the Clerk of the Court marked the case as disposed. In March 2014, the borrower brought a new action seeking to discharge the Bank’s mortgage because the statute of limitations had expired. The Bank did not respond, and in July 2014, an order discharging its mortgage was entered and recorded.

In February 2015, another lender known as KBS gave a mortgage on the property, believing it had a first mortgage because the Bank’s prior mortgage had been discharged by the court. Two months later, the Bank moved to vacate its default in the discharge action. In 2016, the Appellate Division vacated the order discharging the Bank’s mortgage, and the Bank moved to restore its foreclosure action. Meanwhile, KBS brought its own foreclosure action and intervened in the Bank’s action, with each lender asserting that its mortgage had priority.

The motion court granted summary judgment to KBS, holding that KBS’s mortgage had priority. Its holding was based on the doctrine of laches, which is defined as unreasonable, prejudicial delay in asserting one’s rights. The Bank appealed, but the appellate court agreed that “the equitable doctrine of laches [applied] to BNY’s unreasonable delay in vacating a default judgment discharging its prior mortgage on the same property and in restoring its foreclosure action…. KBS, which closed on its mortgage in February 2015 after investigating and finding no prior valid liens, would be prejudiced by the delay if BNY were deemed to have the superior lien after taking no action, for years, in the foreclosure action or to vacate the default judgment in the [earlier] action.”

In addition, KBS was held to be “a bona fide encumbrancer” entitled to protection, because “nothing in the public record created any issues affecting title when KBS entered into its mortgage, notwithstanding BNY’s later successful efforts to vacate the default judgment and restore its foreclosure action.” Ganfer Shore Leeds & Zauderer represents the successful lender, KBS, in this case.