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Consolidated Mortgages Filed Prior to Common Charges Lien Qualify as “First Mortgage of Record” Under the Condominium Act

A consolidation agreement that consolidated two mortgages on a condominium unit into a single mortgage agreement constituted “the first mortgage of record” and had priority over the Condominium’s common charges lien, according to a recent decision by New York’s highest court. Plotch v. Citibank, N.A., 2016 N.Y. LEXIS 1098, 2016 N.Y. Slip Op. 3648 (May 10, 2016).

In this case, a bank lent money to the owner of the condominium unit, taking a first mortgage. The bank then lent additional funds, taking a second mortgage and entered into a consolidation agreement whereby the two mortgages were consolidated “into a single mortgage lien,” which was intended to be treated as a single mortgage.  Several years later, the owner stopped paying the common charges on the unit, and the Condominium foreclosed.  Plaintiff purchased the unit at the foreclosure action, taking title “subject to the first mortgage on the premises” pursuant to the terms of the auction.  Those auction terms were consistent with Real Property Law § 339-z, under which a condominium board’s lien for unpaid common charges has priority over other liens except for tax liens and “all sums unpaid under a first mortgage of record.”  (A second or subsequent mortgage does not have priority, except for certain governmental lenders.)

Plaintiff filed a declaratory judgment action against the bank, asserting that the bank’s second mortgage was subordinate to the common charges lien and was extinguished at the foreclosure sale. The courts, including the Court of Appeals, rejected the purchaser’s argument and held that the consolidation agreement, which included the amounts owed on both of the original mortgages, was the “first mortgage of record.”  The Court of Appeals noted that the condominium’s common charges lien had not been filed at the time the consolidation agreement was filed, so that “the consolidation agreement … did not interfere with an rights of the condominium board.”  To disallow the consolidation agreement as representing the “first mortgage of record” under these circumstances, the court observed, “would lead banks and condominium owners to simply take additional steps to satisfy the original mortgage, take out a new mortgage, and pay the additional fees required to achieve precisely the same result.”