Rosenberg & Estis Wins Case of First Impression that Helps Lenders, Servicers Prevent Borrower Delays in Commercial Foreclosure Proceedings

by | Nov 6, 2023 | Press Releases

Rosenberg & Estis, P.C., a premier New York City real estate law firm, has won a significant victory at the Appellate Division, First Department, in a case of first impression, setting precedent for lenders and servicers to prevent debtors from delaying commercial foreclosure auctions based on technical arguments.

Howard W. Kingsley, a Member of Rosenberg & Estis, and Laura A. Raheb, an Associate, represented the lender, Broome Lender LLC, in obtaining a unanimous reversal of an earlier Supreme Court denial of its motion for summary judgement on its claim to foreclose an $8.1 million mortgage on a commercial condominium unit in SoHo.

The issue on appeal concerned the evidence necessary to prove that a successor lender or servicer is, in fact, the holder of the note and mortgage, so that it had “standing” to commence the mortgage foreclosure case. The lower court found that the lender could not establish standing because the allonge, or endorsement, from the initial lender was not stapled to the original note, even though the lender was able to establish standing by other means.

On appeal, the Appellate Division decision stated that a lender or servicer can prove standing without producing the allonge firmly affixed to the original note if other ways to establish standing are present. In this case, standing was established because there was a written assignment of mortgage, which also included the assignment of the note to the assignee, although the proof was questionable as to whether the allonge was stapled to the note.

“This important decision answers an open question and helps reduce the number of evidentiary and other technical issues that borrowers often raise to create a smoke screen when a loan has been assigned,” said Kingsley. “The ways to prove standing have been decisively clarified by this ruling in holding that although standing can be established in several ways, only proof of one method is required, even if the proof regarding other methods was insufficient.”

The defendant-borrower, Broome Empire LLC, an affiliate of Empire Capital Group, borrowed the principal amount of $8.1 million from Sterling National Bank, which loan was secured by an interest-only mortgage on a property at 430 Broome St. in Manhattan’s SoHo neighborhood that matured on March 31, 2021.

The borrower failed to pay off the loan in full by the maturity date. Later that year, Sterling assigned the defaulted loan to the plaintiff-lender. Of significance, the assignment documents included two instruments — an allonge by which Sterling endorsed the note over to plaintiff, and an assignment of the recorded mortgage, which also assigned the note. Plaintiff, by prior counsel, commenced the mortgage foreclosure action and thereafter moved for summary judgment. However, the lower court denied plaintiff’s motion because the lender did not submit sufficient evidence to establish (a) the loan default, and (b) that it had standing to bring the case because, among other things, it did not prove that the allonge was “firmly affixed” or stapled to the note as required by law.

R&E was then retained and appealed from the lower court’s denial of summary judgment. R&E made two primary legal arguments that were not directly made to the lower court.

R&E first argued that there was no need to prove the borrower’s default with any affidavits because borrower had, in fact, admitted that it defaulted under the loan in its sworn Hardship Declaration (which many borrowers filed during the COVID-19 pandemic to obtain financial breathing room). The Appellate Division agreed, finding that supporting affidavits were not needed.

R&E’s second argument was never previously raised in any case in the New York State Courts. R&E argued that standing can be established in different ways, and even if one method was deficient, standing can be proven by another method.

The Appellate Division agreed that the lender did not have to prove that the allonge was firmly affixed or stapled to the note because standing was established in another way — by a written assignment of the note. Specifically, the Appellate Division held the lender established standing “by virtue of the assignment from Sterling to [the lender] through a notarized assignment” and was “not required to establish standing through physical delivery of the note…through the allonges purportedly annexed to the note.”

“We are very satisfied that we were able to successfully assist our client to convince the Appellate Division that a court’s focus should be on the documents rather than evidentiary or other technicalities designed as a delay tactic for borrowers,” said Kingsley. “This case sends a strong message to defaulting borrowers that the documents will prevail over their technical arguments, and the common defense of standing will easily be defeated by proper documentation.”

The decision paves the way for the note holder to move forward with an auction of the ground floor retail condo at 430 Broome St.