Appellate Division to Foreclosing Lenders: “Do Less” Because If You Do More You Might Make Yourself Liable For Damages

 by:  Peter J. Gallagher (@pjsgallagher)


There is a scene in the movie "Forgetting Sarah Marshall" where the main character goes to a surf instructor to teach him how to surf. The lesson is not that helpful because, among other things, the instructor gives the main character advice that is impossible to follow, like: "Don't do anything. Don't try to surf. Don't do it. The less you do the more you do." And, then later: "try less" and "do less."

I was reminded of this decision when I read the Appellate Division's recent opinion in McRoy v. Eskander. In that case, the Appellate Division held that a lender was not a mortgagee in possession and therefore could not be liable for injuries sustained by someone who slipped and fell on the sidewalk in front of the property. The reason the lender could not be deemed a mortgagee in possession was because it had done almost nothing to maintain the property in the 18 months after it obtained a final judgment of foreclosure.

In McRoy, plaintiff slipped and fell on snow and ice in front of a four-unit apartment building that was owned by Defendant Eskander. At the time of plaintiff's fall, however, the building had been vacant for approximately 18 months. Eskander had defaulted on his loan with Bank of America ("BofA"), which led BofA to foreclose on its mortgage on the property. BofA obtained final judgment of foreclosure but had not proceeded to a sheriff's sale at the time of plaintiff's fall. Once final judgment of foreclosure was entered, Eskander stopped maintaining the property. Except for performing yard work once, BofA did not maintain the property either. It did periodically inspect the property to ensure it was vacant and, to protect its collateral, it paid the real estate taxes and a water bill.



Plaintiff originally sued only Eskander, but later amended the complaint to add several other defendants, including BofA. He argued that the property was a commercial property and that BofA was a mortgagee in possession. Therefore, plaintiff argued that BofA had a duty to warn him of all hazardous conditions on the sidewalk. BofA moved for summary judgment. The trial court granted the motion and the Appellate Division affirmed.

In its decision, the Appellate Division touched on a number of issues that should be familiar to property owners and those who represent them.

First, the Appellate Division assumed, without deciding, that the property was commercial. (Had it read my post from last week on that very subject, it may not have made that assumption.) As such, the owner of the property had a duty to maintain the sidewalks abutting the property including by removing snow and ice from the sidewalks.

Second, the Appellate Division noted that when a lender "takes out of the hands of the [borrower] the management and control of the estate," the lender becomes a mortgagee in possession. The duty of a mortgagee in possession is "that of a provident owner," which includes the duty to manage and preserve the property. As such, a mortgagee in possession can be liable for damages to the property while it is in control of the property, and for damages arising out of torts that occurred when it was in control of the property.

Third, the Appellate Division held that when determining whether a lender is a mortgagee in possession, the "acts of the [lender] under the circumstances determine whether or not possession and management of the premises have been undertaken by the [lender]." If a lender has "complete control over the property" — i.e., it collects rent, pays all bills, manages the property, and makes all repairs — then it will be deemed a mortgagee in possession.

Turning then to the facts in McRoy, the Appellate Division held that BofA was not a mortgagee in possession and therefore could not be liable for plaintiff's injuries. According to the Appellate Division: "BofA never supplanted or supplemented Eskander's control or management of the property, who chose to let the building be vacant and ignored his duties as a landowner by failing to remove snow and ice from the abutting sidewalk." The Appellate Division emphasized that BofA could not be a mortgagee in possession because, but for one instance when BofA performed yard work, it "never expended any effort to preserve of improve the premises." Moreover, BofA's periodic inspection of the property to ensure it was vacant, and its payment of real estate taxes and a water bill were done to "protect its collateral[,] not to exert any control over management of the property."

The lesson for lenders is to be careful not to do to much. If a lender takes over the management and maintenance of a property after obtaining final judgment of foreclosure, it might make itself liable for damage to the property and for damages for torts that occur on its watch.

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