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70 Legal Industry Update State Focus NEW YORK PTFA COMPLICATES FORECLOSURE PROCESS IN NEW YORK By: C. Lance Margolin, e Margolin & Weinreb Law Group e Protecting Tenants In Foreclosure Act, (PTFA) enacted in May, 2009 as Public Law 111-22, was a set of sweeping legislative changes designed, as its name suggests, to protect the rights of tenants living in houses impacted by foreclosure. e effect of this statute, especially in New York, has been dramatic. New York passed its own similar version of the PTFA shortly after the federal laws were enacted. e general purpose of the PTFA is to ensure that tenants who have "bona fide" leases and who meet other requirements, get to live out their leases despite the fact that the house had been foreclosed. Under most prior laws, these leases would have been invalidated by the foreclosure process. Challenge #1: e Wrath of Moskowitz Prior to the PTFA, New York REO evictions were typically commenced by service of a notice to quit with a certified copy of the foreclosure deed. All occupants (prior owners, families, tenants with leases, squatters, etc.) received only a 10-day notice to quit. Service of process of the notice to quit and the deed was made in the same way used to serve all other court documents: personal and in hand service, if possible; if not, then by serving a person of suitable age and discretion at the dwelling; if not, then by "nail and mail" followed by certified mailings. Once the notice to quit expired, the court action for the warrant was commenced. In 2011, that process came to a grinding halt. In Home Loan Services v Moskowitz, 1 the New York Appellate Term, second department held that the foreclosure deed must be "exhibited" to the occupants. Merely attaching a copy of that deed to a notice to quit was insufficient to satisfy New York RPAPL 713 (5, which requires that the deed be "exhibited." It is important to note that Moskowitz dealt only with notices served by "nail and mail," the type of service that is typically used when no occupants can be found at the premises. What the court probably did not real- ize or concern itself with was the unintended consequences of its decision. For starters, it is customary in a New York REO eviction to name the prior owners and borrowers. is is done to terminate their possible possessory rights even if they no longer reside in the premises. Under Moskowitz, it is now potentially impossible to evict non-occupying prior owners and borrowers since "exhibition of the deed" by in hand delivery at the premises cannot be done if the intended recipient is not residing in the premises. e same applies to John Doe and Jane Doe, who are also typically named in REO evictions, as the Doe's represent all unknown people that may be found in the house at the time of the lockout. e same issue arises when the occupants will not open the door and accept in hand delivery of the deed, as mandated by Moskowitz. It is beyond dispute to say that in New York City and the urban areas, that virtually nobody will open the door for a process server so as to accept in hand delivery of any legal papers. In short, the require- ments of Moskowitz can preclude an REO owner from properly serving the occupants of the REO property with the foreclosure deed, which is a prerequisite to commencing an REO eviction. e Moskowitz case has not yet been challenged or overturned on appeal. e good news is that not every tenant at- torney is aware of Moskowitz. And, it appears that many judges are not comfortable applying the draconian Moskowitz requirements unless pressed to do so by the occupants' attorneys. e net result of Moskowitz is that while the eviction process is taking place, REO owners are best served by vigorous cash for keys offers and better communication with occupants outside the realm of the courthouse. Challenge #2: So Says Perez Co-op apartments are fairly unique to east coast states. A co-op is typically a dwelling unit in a building where ownership of an individual apartment is reflected by a stock certificate (rep- resenting that unit owner's proportionate share of ownership in the corporation that owns the building) and a proprietary lease (that gives the owner exclusive rights as a tenant of the co-op corporation, to reside in that unit). ere is no deed; there is no fee ownership. Co-ops are foreclosed by a public auction. e secured party auctions off the stock and lease, the documents held by the lender as collat- eral for the loan. e winning bidder then owns the unit, subject to approval by the co-op board. Board approval is typically not required where the winning bidder is the secured party. e winning bid is reflected in a memoran- dum of sale or a similar form. e notice to quit is attached to this document and they are then served on the occupants so as to commence the eviction process. at was the process until 2013. Federal Home Loan Mortgage v. Perez 2 decided that New York law relating to post-foreclosure evic- tions, addresses only fee ownership (i.e., only properties owned by virtue of a deed) and not co-op stock and lease ownership. Article 7 of the New York RPAPL establishes the right to evict based upon is "no landlord tenant relation- ship," such as after a mortgage foreclosure. And as required by Moskowitz, the statute mandates "exhibition of the foreclosure deed". However, in a co-op, there is no foreclosure deed to exhibit, only a memorandum of sale. is loophole was ignored until Perez. e court in Perez pointed out what everyone knew, but also what everyone had been sidestepping, that is, that the statute does not recognize service (exhibition) of a memorandum of sale to com- mence a co-op REO eviction. Perez decided that it is up to the legislature and not the courts to close this loophole. (Oddly enough it was the same attorney who argued and won the tenants' arguments in both Perez and Moskowitz). e end result is pretty much the same as in Moskowitz. ankfully, most tenant attorneys are not aware of the Perez decision and most courts are not enforcing the mandates of Perez unless pressed by the tenants' attorneys. Reacting to Perez, some lenders and servicers, have the stock and lease transferred to their names after the auction (as opposed to addressing this at REO) and then serve the occupants with notices cancelling their leases. is is a creative solution but frankly, might best be considered as a last resort due to (a) the time involved to complete the paperwork; (b) the costs imposed on these transfers by the co-ops; (c) that not every co-op will allow such a transfer. Many co-ops require that the owners be the individuals who will be residing in the apartment, some- thing that obviously is not possible with a lender and servicer owner. New York's protocol for post-foreclosure evic- tions, especially after the PTFA and the Mos- kowitz and Perez decisions came into being, are not for the impatient or weak of heart. However with a bit of patience and good counsel, virtually every obstacle can be overcome. 1 Home Loan Services v Moskowitz, 31 Misc 3d at 38. 2 Federal Home Loan Mortgage v Perez, 968 NYS 2nd 317. What the court probably did not realize or concern itself with was the unintended consequences of its decision.

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