Why Timing Means Everything in Condo Foreclosure

A condo board let an arrears situation drag on for years, convinced they had no chance of recovering delinquent common charges against an owner with massive tax and mortgage debts. They were wrong. Eric Goldberg, partner at Kahn & Goldberg, reveals how a stroke of luck involving a 60-day window between the board and the IRS filing liens completely changed their outcome. Goldberg shares the details. Condo foreclosures are high-stakes — and timing can mean the difference between recovering everything and losing it all. Habitat’s Paula Chin conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Paula Chin: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Paula Chin with Habitat, the New York City magazine for co-op and condo board directors. My guest today is Eric Goldberg, a partner at Kahn and Goldberg. Proceeding with a foreclosure action when a unit owner is in arrears is a drastic step and a measure of last resort for condo boards. Before moving ahead, they need to determine whether a foreclosure even makes good business sense, which often boils down to who has liens on the unit and who has priority.

Eric, let's start with the basics. Just briefly, what is a foreclosure and how does that work in condos as opposed to co-ops? 

Eric Goldberg: Okay, thanks Paula. So co-op and condo foreclosures are very different. With a cooperative building, typically foreclosures against those owning shareholders are non-judicial, meaning that they're done outside of the courthouse.

They do not necessarily involve the filing of a lawsuit. The condominium, because the condominium is real property, it's deeded property, condominium boards are required to judicially foreclose, meaning to go into court and initiate a lawsuit in order to affect that foreclosure.

Paula Chin: And what does that mean then? Why is it more difficult for condo boards? 

Eric Goldberg: Condo boards have to navigate an entire lawsuit in order to sell the property, which would eventually satisfy the lien for unpaid common charges. It's a much more difficult and time consuming process, because there's more parties involved, and there's different stages of a court litigation that have to take place. There's motion practice and there could be defendants that come into the case and assert defenses and try to block the foreclosure. With a cooperative building, a cooperative can notice its rights under the Uniform Commercial Code, notify all interested parties, schedule a sale, sometimes within 90 or 120 days, hold a public auction and assert their rights over their collateral that way in order to have their maintenance arrears paid. 

Paula Chin: Now, my understanding is that with condos a lot of the decision is based on where you stand in line in terms of the lien with the mortgage.

Can you explain that to us? 

Eric Goldberg: Yeah, that's right. Paula. Lien priority is a very important consideration in condominium foreclosure. Condominium boards need to hire a counsel who are adept at figuring out where the condominium's lien for its unpaid common charges stand in line with respect to any other liens that may be out there.

Condominium owners could have liens against them for a number of reasons, including, for instance, unpaid taxes. In New York City, there's a lot of liens for unpaid parking tickets. There could be judgments against the condominium owner that may or may not have priority over the condominium's lien for unpaid common charges.

And a careful assessment of those liens really has to be done in order for a condominium board to determine whether and how a foreclosure lawsuit will be brought and what their expectation should be with regards to a foreclosure lawsuit. 

Paula Chin: So in the best case, what can a condo board recover, and in the worst case, what do they lose?

Eric Goldberg: In the best case, a condominium board stands to recover all of the common charges that it's owed from the unit owner. If the condominium can assert more of a lien priority against the owner than other creditors that may be out there, and if there's equity in the unit that eventually will be sold at an auction, the condominium board does stand to recover in most of those cases all of its common charges/ arrears. If there are liens that take priority over the condominium's unpaid common charges, then the condominium board worst case scenario, may not recover anything by reason of its foreclosure. 

Paula Chin: Is there a typical order of priority in terms of liens?

I assume condos, of course, are behind the mortgage bank, but are they always behind, as you mentioned, taxes or other decisions against the unit owner? 

Eric Goldberg: Yes, Paula, there is a typical lien priority. According to the New York Condominium Act, first mortgages do have priority over a condominium common charge lien, which would be a lien for the amount of unpaid common charges by the unit owner and which the unit owner owes to the condominium.

So an analysis of the value of the unit, the equity in the unit as against the known mortgage balance, the balance of the first mortgage that might be outstanding, is typically done at the outset of this analysis to figure out, okay, is there equity in the unit over and above any first mortgage where we could expect to recover our unpaid comment charges, if we go forward with a foreclosure. Other liens that may take priority over the condominium's lien would be liens which are filed prior in time to the condominium's common charge lien. So unlike cooperatives where the lien for unpaid maintenance exists in perpetuity, meaning it exists from the time that the shareholder acquires the unit throughout their ownership, so that the unpaid maintenance in a cooperative automatically has a first lien priority. In a condominium, the condominium does not actually have a lien for unpaid common charges until it takes the affirmative step of filing the lien paperwork with in New York City, the city register's office. 

Paula Chin: So that obviously means it's essential for condo boards to move quickly when an arrears situation arises.

Does this mean that if they do that and they file their lien, say before federal or state or any other money that the unit owner may owe, does that mean they move up in the line? 

Eric Goldberg: Yes, Paula. It's not even necessarily that they move up in the line. It's that they are placed up in the line by virtue of that first filing of the lien, so that if there is a tax lien that's filed after the condominium's common charge lien, the common charge lien may very well have priority over and above a state or federal income tax lien. So that when the unit goes to foreclosure sale, those proceeds can be realized by the condominium rather than those taxing authorities. And of course, when we're talking about tax liens, I do wanna be clear we're not including real estate taxes that might be due and owing on the condominium unit.

So those real estate taxes would also have priority over the condominium's common charge lien. 

Paula Chin: So what kind of tax liens are we talking about potentially? 

Eric Goldberg: The ones that a lot of condominium boards misunderstand and assign a mistaken priority to are income tax liens. So if you have a condominium owner that owes several hundred thousand dollars to either the IRS or New York State and income taxes and those taxes or in the state's case tax warrants have been reduced to a lien and filed with the city register's office or made public record. A lot of condominium boards assume that those income tax liens take priority over the condominium's own lien, so that if there's a first mortgage on the unit and large income tax liens on the unit, there would be no equity left for the condominium to recover against if the unit was sold at auction.

But that's sometimes not the case, and it depends on the attorney for the condominium board doing a title search at the outset of this analysis and then piecing together very carefully which liens were filed when. First the types of liens and then the order in which they were filed. And then there's a careful analysis under both federal and in New York state statutes concerning those liens and whether they take priority or whether they attach to proceeds from a potential sale of real property that taxpayer owns.

Paula Chin: Okay. Eric, have you recently worked with any condo buildings where there wasn an arrears situation that perhaps they let linger? And what was the consequence and what was the end result there? 

Eric Goldberg: Yes, I had one recent case where a condominium board had mistakenly put off foreclosing for years against an owner who had a very large common charges balance because they knew that there were income tax arrears against this owner. And the condominium had sat idle for a long time, allowing not only that balance to increase, but also the owner's unpaid mortgage balance to increase. They had not done a careful analysis of these tax liens and the lien priority situation.

So the effect of that was that once they did decide that there was let's call it value in pursuing the foreclosure that the balances owed on both the condominium common charges lien and the first mortgage were so large that it threatened to wipe out any value or worth in pursuing a foreclosure.

And it also put them in a position where they were racing against the mortgage bank to the foreclosure finish line, which is essentially the public auction of the unit, so that they could free up any of that equity that was in the unit and actually get paid. 

Paula Chin: And what happened at the end? 

Eric Goldberg: After a very careful analysis of the lien priority situation against that unit, it was determined that extremely large tax liens were filed behind in time as against the condominium's common charge lien, so that the condominium could pursue foreclosure and sell to a new owner at a public auction. The new owner, of course, taking subject to the outstanding first mortgage, but perhaps there being enough equity-- that's for the new owner to determine-- that they would actually close on this unit. And not only did the condo recover 100% of its common charges lien, but they also have a new buyer in the unit or a new owner who's now paying monthly common charges.

And that's to the benefit of all owners at the condominium who were shouldering this burden on their own for five or six years. 

Paula Chin: It's interesting right, that as you said , it lingered for so long, but they were very fortunate in that they were able to file a lien in time to get their money back.

How did that happen? 

Eric Goldberg: The filing of the lien-- it could have been done earlier in this case, but it was actually let's call it sheer luck that they beat the IRS by about 60 days in filing that document. And that stroke of luck because I didn't file the lien for them, but that stroke of luck allowed the situation to play out where three to $400,000 of income tax debt was not attached to this property because the condominium's lien was filed before that income tax lien.

So that really allowed the board to say, okay, this makes sense to foreclose against. We don't have to wait for the bank, who's gonna be much slower in foreclosing, to find us a new owner for this unit. We're gonna do it ourselves. And not only are we gonna get a new owner, but we're going to get that money that's available in equity in the unit over and above the first mortgage instead of, in this situation, the IRS getting it.

Paula Chin: I see. They were very fortunate then. . Eric, what would you say the takeaway is here for condo boards when an arrear situation comes up? 

Eric Goldberg: I'm sure a lot of your listeners have heard this before, but act quickly. As soon as there is an arrears situation in a condominium, you have to file the lien very quickly and that lien preserves your rights as against any other creditors of the unit owner in the event that you need to foreclose on the unit. If the lien becomes public record, and it puts everybody else in the world on notice that the condominium is owed a debt and that debt is secured by this unit according to applicable federal and state laws regarding lien priority. The condominium board after filing the lien has to have its counsel run a title search, and advise the board on what other liens and creditors might be out there so that the board can make an informed decision as to whether or not a foreclosure lawsuit is warranted, because the board is going to have to carry that foreclosure lawsuit and the associated expense of it forward. In some situations a board might say we know that the owner is not paying us and the owner is also not paying the bank, and there's no equity in the unit, so we might just sit back and let the bank get us to foreclosure, rather than putting more of our owners' money into this unit. It's really a careful analysis and discussion with the condominium board that has to be done alongside the handling attorney so that the board can make an informed decision as to what steps it needs to take with regards to the unit.

Paula Chin: Eric, this has been, I think, really informative for all of our condo board directors who are listening. Thank you so much for joining us. 

Eric Goldberg: Thank you, Paula. And I hope so. I hope it has been informative.