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Volume 10 - Opinions of Counsel SBRPS No. 93

Opinions of Counsel index

Taxes (delinquent) (mortgage foreclosure proceedings) - Real Property Actions and Proceedings Law, § 1354; Real Property Tax Law, § 1110:

Outstanding real property taxes must be paid out of the proceeds of mortgage foreclosure sales for property located throughout the State.

We have been asked to render an interpretation of section 1354 of the Real Property Actions and Proceedings Law (RPAPL), which generally relates to the distribution of the proceeds from mortgage foreclosure sales. That section requires, among other things, that the proceeds of such sales must be used to pay any unpaid real property taxes - or in the parlance of tax enforcement, to “redeem” the property from any delinquent tax liens (Real Property Tax Law, § 1110). The specific question is whether this requirement applies only in certain cities, or throughout the State. The answer may be found both in the language of section 1354 itself, and in its legislative history.

Section 1354 states in pertinent part:

Distribution of proceeds of sale. 1. The officer conducting the sale shall pay, out of the proceeds, unless otherwise directed, the expenses of the sale, and pay to the plaintiff, or his attorney, the amount of the [mortgage] debt, interest and costs, or so much as the proceeds will pay. . . .

2. The officer conducting the sale shall pay out of the proceeds {1} all taxes, assessments, and water rates which are liens upon the property sold, and redeem the property sold from any sales for unpaid taxes, assessments or water rates which have not apparently become absolute. In any city having a population of three hundred thousand or more [i.e., New York City or Buffalo] or any city having a population between one hundred fifty thousand and one hundred seventy-five thousand [i.e., Syracuse], such officer shall pay out of the proceeds any liens or incumbrances [sic] placed by a city agency upon the real property which have priority over the foreclosed mortgage. The sums necessary to make those payments and redemptions are deemed expenses of the sale. * * *

As is evident, the first sentence of subdivision two unequivocally requires the payment of outstanding taxes, assessments and water rents out of the proceeds of the foreclosure sale, {2} without regard to the location of the property. Upon a cursory reading, the second sentence may seem to be to the same effect - except that it also contains a geographical limitation. However, for the reasons that follow, we believe that the second sentence applies only to liens and encumbrances other than real property tax liens.

When section 1354(2) was originally enacted in 1962 (c.312, § 27), it had essentially the same first sentence as it has today, {3} but it contained nothing resembling today’s second sentence. It was quite clear at that time, therefore, that the law constituted a directive that unpaid taxes, assessments and water rents were to be paid out of the proceeds of a mortgage foreclosure sale involving property anywhere in the State{4}  This was not a new directive, by the way; a similar law had been in effect in one form or another since at least 1880{5}  Thus, the seemingly universal tax payment requirement that now appears in the first sentence of section 1354(2) has been a longstanding aspect of the foreclosure sale process. {6}

By contrast, the second sentence of today’s section 1354(2) can trace its history only back to 1977 (c.854). That sentence was added to section 1354(2) for the express purpose of extending the substance of the first sentence to other types of liens in New York City. According to the sponsor’s memorandum, various New York City agencies (in particular, the Department of Health and the Housing and Development Administration) had been regularly incurring expenditures to “correct conditions which endanger [the] health and safety of tenants in multiple dwellings.” These city agencies had acquired liens against these properties to secure the amounts so expended, but those liens had proven to be difficult to enforce in many instances. This legislation was proposed as a partial solution to that problem. As the sponsor’s memorandum stated:

The proposed bill would provide for payment of these liens in the course of a mortgage foreclosure proceeding. Such liens would be treated in the same manner as taxes, bringing them within currently existing procedures (emphasis added).

In effect, then, the 1977 legislation was clearly intended to leave intact the longstanding Statewide requirement that outstanding taxes (and assessments and water rents) be paid out of the proceeds of mortgage foreclosure sales, while adding the new requirement that within the City of New York, liens and encumbrances held by city agencies which did not constitute taxes would also be payable out of the proceeds of the sale. Stated another way, the second sentence was clearly intended as an expansion, not a limitation, of the first.

The liens and encumbrances clause was extended to Buffalo in 1997 (c.232 {7}) and to Syracuse in 1998 (c.431). As a review of either amendment will confirm, each of these enactments was worded so as to alter the geographical scope only of the second sentence, not of the first. Thus, while there are no cases on point, {8} it seems clear that the first sentence of section 1354(2) continues to apply to taxes, assessments and water rents throughout the State, while the second sentence applies only to other liens and encumbrances held by city agencies in New York City, Buffalo and Syracuse.

That being said, it must be recognized that there seems to have been some misunderstanding recently about the nature of the relationship between the first and second sentences of section 1354(2). This confusion is evidenced to some extent by the materials in the Governor’s Bill Jacket for the Buffalo amendment, and even more so by the materials in the Bill Jacket for the Syracuse amendment. Nonetheless, to the extent that the comments in those Bill Jackets address a point which was not actually at issue, {9} they may be viewed as the legislative equivalent of dicta.

Moreover, if one were to take the position that the second sentence subsumes the first, one would essentially be arguing that the 1977 legislation which added the second sentence effectively repealed the first sentence by implication. Not only is this construction contrary to well established principles (see, McKinney’s Statutes, § 391 et seq.), but it would mean that the Legislature’s intent when it passed the 1977 amendment was to remove jurisdictions outside of New York City from the scope of section 1354(2), and thereby eliminate the century-old requirement that the taxes of such jurisdictions be paid from the proceeds of mortgage foreclosure sales. The legislative history of the 1977 amendment simply does not support such a construction.

Accordingly, it is our opinion that the first sentence of section 1354(2) of the RPAPL has always been and remains of general application throughout the State, and so taxes, assessments and water rents must be paid out of the proceeds of mortgage foreclosure sales, no matter where the property is located.

December 17, 1999

{1}  Until recently, the word “proceeds” was followed by the phrase “unless the judgment otherwise directs,” which meant that the court had discretion to allow the property to be sold subject to any tax liens. This phrase was removed in 1997 (c.232).

{2}  Indeed, the property taxes and other expenses are to be paid before the mortgage itself is paid (Board of Managers of 235 East 22nd Street Condominium v. Lavy Corp., 233 A.D.2d 158, 649 N.Y.S.2d 668, 670 (1st Dept. 1996), infra).

{3}  The only difference is that today’s version lacks the phrase conferring discretion upon the court (see endnote 1).

{4}  The only exception was that the court in a particular case could direct otherwise (see endnote 1). This exception - which was not based upon property location - has since been eliminated (id.).

{5}  See, former § 1676 of the Code of Civil Procedure as added by L.1880, c.178; former § 1087 of the Civil Practice Act as added by L.1920, c.925 and as amended by L.1933, c.741. The Historical Note appearing under § 1354 in McKinney’s RPAPL (Book 49½, p.146 (1979)) indicates that this provision was ultimately derived from L.1870, c.712, § 2, but that cannot be correct, since the cited chapter relates exclusively to the charter of the Village of Middletown, has nothing to do with the mortgage foreclosure process, and has no section two.

{6}  Interestingly, while this requirement certainly worked to the benefit of municipalities that had imposed taxes upon properties that were subject to mortgage foreclosure sales, the courts held that its real purpose was to benefit the purchasers of those properties, by ensuring that they would obtain clear title (Wesselman v. Engle Co., 309 N.Y. 27, 127 N.E.2d 736 (1955); McConihe Realty Co. v. Henry Scharnberger, Inc., 240 App. Div. 861, 267 N.Y.S. 135 (2d Dept. 1933)) . There is nothing in the case law to suggest that purchasers of such properties outside New York City were not entitled to the same protection; indeed, the predecessor to section 1354(2) was invoked in at least some upstate cases (see, e.g., Kronenberg v. Ellenville Nurseries & Greenhouses, Inc., 22 Misc.2d 247, 196 N.Y.S.2d 106 (Sup. Ct., Ulster Co, 1960); Dunkirk Trust Co. v. Dunkirk Laundry Co., 17 Misc.2d 298, 182 N.Y.S.2d 381 (Sup. Ct., Chautauqua Co., 1959)).

{7}  This law also removed the discretionary clause from the first sentence (see endnote 1).

{8}  There have been two cases applying section 1354(2) since it was amended in 1977 (Golden City Commercial Bank v. Hawk Properties Corp., 236 A.D.2d 282, 658 N.Y.S.2d 257 (1st Dept. 1997); Board of Managers of 235 East 22nd Street Condominium v. Lavy Corp., 233 A.D.2d 158, 649 N.Y.S.2d 668 (1st Dept. 1996)). However, both cases involved property in New York City, and neither sheds any light as to whether this provision may be invoked elsewhere.

{9}  The issue presented by the bills was whether a change should be made to the second sentence to accommodate Buffalo and Syracuse.