Lenders are often faced with a scenario of litigating a foreclosure action for years – only to learn that a necessary party to the foreclosure action was inadvertently omitted as a defendant.
The omission of a defendant with an interest in the mortgaged property is problematic because “[t]he absence of a necessary party in a foreclosure action leaves that party's rights unaffected by the judgment and sale, and the foreclosure sale may be considered void as to the omitted party.” 6820 Ridge Realty LLC v. Goldman, 263 A.D.2d 22, 26 (2d Dep’t 1999).
There are wo potential remedies that may permit a lender to avoid having to replicate the entire process and instead simply add nunc pro tunc the omitted necessary party, post-sale: strict foreclosure and reforeclosure.
“The terms ‘strict foreclosure’ and ‘reforeclosure’ are often used interchangeably, and like a strict foreclosure action, a reforeclosure action results in a judgment (for the lender) which gives a junior lienor or encumbrancer a specific time period in which to exercise the right to redeem or foreclose. However, there are some significant differences between the statutory provisions governing these remedies.” 6820 Ridge Realty LLC, 263 A.D.2d at 26–27.
Section 1503 of the Real Property Actions and Proceedings Law (RPAPL) permits a reforeclosure action to be maintained even where an action against the defendant to foreclose the mortgage under which the foreclosure sale was held or to extinguish a right of redemption would be barred by the statute of limitations. That is, RPAPL 1503 is applicable to allow a foreclosure under specific circumstances even years after the original statute of limitations has run. Targee St. Internal Med. Group, P.C. v. Deutsche Bank Nat’l Tr. Co., 92 A.D.3d 768, 769 (2d Dep’t 2012) (“Contrary to Deutsche Bank’s [the omitted foreclosure defendant] contention, the reforeclosure action under RPAPL 1503 would properly be maintainable against Deutsche Bank even if the applicable statute of limitations barred an action against it to foreclose on the Targee mortgage.”).
Under applicable circumstances, RPAPL 1503 can therefore be a useful tool for lenders where it is discovered – after a foreclosure judgment is issued and after the foreclosure statute of limitations has otherwise run – that a necessary party was omitted from the foreclosure. For example, where a bank has foreclosed on the record holder of a property, and there is concern about the validity of the deed to, or from, the record holder, RPAPL 1503 may be used. That is, the lender will have the option to invoke RPAPL 1503 against the grantor should that grantor eventually challenge the validity of the deed.
This powerful provision will help ensure that the lender does not suffer any loss to its collateral as a result of a defect discovered in, for example, a deed years after the foreclosure that prevented joinder of a necessary party to the original foreclosure. Bass v. D. Ragno Realty Corp., 111 A.D.3d 863, 865 (2d Dep’t 2013) (“RPAPL 1503, by its terms, permits a reforeclosure action against a person who may set aside the judgment, sale or conveyance of the foreclosed property, has a junior mortgage, or has an equity of redemption.”).
RPAPL 1503 does come with a powerful limitation as to its use. “"Perhaps due to the fact that a reforeclosure action may be maintained even after the right to foreclose the superior mortgage or a right of redemption would be time-barred, RPAPL 1503 further provides that a judgment of reforeclosure may be issued only where it appears that there was a defect in the original foreclosure proceeding [which] was not occasioned by the fraud or wilful neglect of the plaintiff.” 6820 Ridge Realty LLC, 263 A.D.2d at 27. RPAPL 1503 cannot therefore be used where a party was named and then dismissed from a foreclosure to circumvent the statute of limitations, nor can it be used where the plaintiff knew or should have known about the omitted party.
Although there is not a wealth of authority defining this “neglect,” the First Department has held that the failure to name the record owner, when on notice of the record holder could constitute neglect such that vacatur of the judgment of foreclosure and sale, post-sale, is proper. New Falls Corp. v. Bd. of Managers of Parkchester N. Condo., Inc., 10 A.D.3d 574, 577 (1st Dep’t 2004) (not a RPAPL 1503 or RPAPL 1352 analysis). “Plaintiff is not able to explain why, in the absence of some information that PNC was the owner of the unit, it did not name the Simmonses, the mortgagors and occupants of the unit, as owners. It is also significant that, in the face of PNC’s submission of a certified title report showing that it was the record owner as of April 6, 1999, plaintiff never submitted any evidence to the contrary. Thus, from this record, it is not clear that at the time it commenced this action plaintiff did not have actual notice of PNC’s ownership of the unit. If it develops that it did, then the relief sought by PNC should be granted in full.” Id.; see also Polish Nat. All. of Brooklyn, U.S.A. v. White Eagle Hall Co., Inc., 98 A.D.2d 400, 405 (2d Dep’t 1983) (same).
Next, beyond reforeclosure, RPAPL 1352 permits a strict foreclosure action against a person not named in the original foreclosure action, who has either a right of redemption to the subject property or a right to foreclose a subordinate mortgage or other lien. See RPAPL 1352; Bass, 111 A.D.3d at 865. Notably, RPAPL 1352 is not available where the original statute of limitations has expired. See RPAPL 1352. “This provision authorizes the court to issue a judgment that fixes a time period within which any person having a right of redemption or right to foreclose a subordinate lien must act to redeem or begin a foreclosure action. If the person having a right of redemption or subordinate lien fails to redeem the property or commence a foreclosure action within the time period fixed by the court, such person shall be excluded from claiming any title or interest in such property and all title or interest of such person shall thereby be extinguished and terminated.” 6820 Ridge Realty LLC, 263 A.D.2d at 27.
Because RPAPL 1352 operates to “dispose of the encumbrances of those whose interests were junior at the time of the original foreclosure but who were not joined as parties to that action,” a judgment of strict foreclosure can cure a defect in the judgment or sale under the first foreclosure.” Id.; 3 Bergman, New York Mortgage Foreclosures section 32.03. To illustrate, the Second Department has held that a tenant is an individual within the purview of RPAPL 1352, and a successful foreclosure holder may invoke RPAPL 1352 to “obtain a judgment requiring the tenant to either redeem the foreclosed mortgage, or be precluded from claiming “any title or interest in such property.” 6820 Ridge Realty LLC, 263 A.D.2d at 28.
The most typical lender issue is where a defendant has been dismissed from a foreclosure action, and the lender is unable to rejoin that defendant. In that instance, RPAPL 1503 would likely be unavailable, and RPAPL 1352 would permit the lender to strictly foreclose against that defendant so long as the action is brought within the six-year statute of limitations. Bass, 111 A.D.3d at 865.
In sum, lenders may have options to correct the inadvertent omission of parties from foreclosure actions and may do so without setting back foreclosure actions by years – at least under limited circumstances.
Client Alert 2025-100
