Consolidation of Two Mortgages Deemed to Be One Loan

In July 2000, Citibank extended a $54,000 loan to a condominium owner, with an additional $38,000 loan extended the next year. These two loans were consolidated into one loan for a total of $92,000. Some seven years later, the condominium board filed a common charges lien against the unit.

In 2010, the plaintiff bought the unit for $15,100 at a foreclosure auction, subject to the “first mortgage of record against the premises.” The new owner sued Citibank seeking to have the second loan of $38,000 declared subordinate to the common charges lien and thus discharged when the unit was bought at auction. The trial court found that the entire consolidated loan was valid and the purchaser at auction had purchased the unit subject to the consolidated loan. After the Second Department affirmed, the purchaser appealed to the Court of Appeals.

In affirming, the Court of Appeals noted that lien priority was normally determined by the “chronology of recording.” However, in a case that deals with a condominium board’s common charges lien, the law excludes the “‘first mortgage of record.’” While acknowledging that case law existed that could be read to take the exception of the first mortgage literally, it refused to accept the buyer’s argument.

The court first observed that because a consolidation loan was intended as a convenience for the parties, it could not negatively impact any lien that intervened between the two loans. As such, the two liens would retain their separate status and a consolidation loan would not be deemed as one loan. In this case, however, because the loans were consolidated years before the lien was filed with nothing intervening, the consolidation of the two loans did not impact the lien. The court also held that not finding the consolidated loan to be a first loan would put form over substance as there was nothing that stopped the owner from paying off the mortgage and taking out a new “first” mortgage, which would leave that “first” loan in a priority position over the common charges lien, which would accomplish the same result [although one assumes that the defaulting owner’s credit would be insufficient to take another mortgage].

What seemed to be an intuitive outcome required a decision from New York’s highest court highlighting again the extent that some will go to argue their point.

Plotch v. Citibank, N.A., 27 N.Y.3d 477 (2016).