When It Comes to Defaults, Which Has More Weight?

When a sponsor is in arrears to both a lender and a condominium, can the condominium get some of the money it is owed before the lender does? That was the question in AMT CADC Venture v. 455 CPW, LLC.

The Facts

Amtrust Bank is the assignee of a consolidated mortgage, covering three residential units and a commercial garage in the condominium building at 455 Central Park West. The borrower was the sponsor that converted the building to a condominium. It defaulted on the mortgage in 2009. The condo’s board of managers sought to foreclose and, thus, collect the sponsor’s arrears.

This case is about definitions, consolidated first mortgages, and who gets the (presumably limited amount of) proceeds. Under the Condominium Act, if the bank could show it holds a valid first mortgage on the property, it then is first in line to collect after a foreclosure sale because the act clearly states that a condo’s lien will be paid only after a valid first mortgage. The board, of course, wants to be first to collect because there may not be any money left after the bank is paid.

The story starts on September 14, 2007, when Amtrust made a loan to the sponsor that was secured by five residential units and a commercial garage. This mortgage – “the first mortgage of record” (a phrase that was key to the bank’s arguments) – had been consolidated with three other mortgages. The board challenged, among other things, whether the consolidated mortgages all constituted the first mortgage.

The Definitions

The court had to consider the meaning of the “first mortgage of record,” which are the words used in the Condominium Act. The act does not define the term, so the court looked to a 1936 case and determined that the first mortgage of record was simply the earliest recorded mortgage. The court specifically rejected any claim made by the board that the term used in the statute was ambiguous. The court also did not believe it needed to rely on federal statutes for the definition of “first lien,” a point of dispute between the board and the bank.

Furthermore, the board of managers claimed that the condo bylaws invalidated the first mortgage status because they allowed only unit-owners to obtain a mortgage and the sponsor was not a unit-owner covered by this provision. The court found that the term “unit-owner” did not exclude the sponsor, and there were several provisions of the bylaws supporting this idea. The Condominium Act helped; it defines a unit-owner as a “person or persons owning a unit” and a “person” as a “natural person, corporation, partnership, association, trustee, or other legal entity.” Also, logically, if the sponsor was not a unit-owner, then the board would not be able to collect common charges because, as the court pointed out, only unit-owners are required to pay common charges. And if the board couldn’t collect, then it could hardly put a lien on the sponsor units for unpaid common charges. The court concluded that the sponsor was a unit-owner as the term is used in the bylaws and the act.

The Mortgages

Furthermore, the board argued that, even if the bank had a first mortgage superior to that of the board’s lien, that first-in-line position only applies to the first mortgage and not those subsequently consolidated. The court did not agree with that argument, ruling that the priority rights remained intact and were held by the bank. Citing prior case law, the court explained that where the mortgage consolidation document was recorded before the board recorded its lien, the consolidated mortgages become the first mortgage.

The bottom line? The board’s lien came in second, and, because it was a first mortgage of record, the bank’s mortgage took precedence.

The Takeaway

So why is this case important? The Condominium Act is clear that a valid first mortgage has priority over a common charge lien. It is highly significant if condominiums can limit the amount the bank is allowed to collect in a first position. Although this has always been an issue, we are seeing more and more cases where boards are looking for ways to challenge a lender’s apparent right to receive – before any other creditor is paid – all money claimed under the mortgage. Individual condominium units may be heavily mortgaged. When you add interest at the “default rate” under the mortgage, there may be little if anything left for the condominium. Therefore, if they can get some – if not all – of the money before the bank does, then that’s a big deal.

Attorneys

For Plaintiff

Greenberg Traurig

For Defendant Board of Managers
Gallet Dreyer & Berkey