NYCTL 1998 TRUST AND BANK OF NEW YORK NYCTL 1998 v. ONEG SHABBOS INC (2005)

Can a defaulting defendant litigate the amount awarded in attorney's fees after the foreclosure sale?

The defendant, who defaulted in an action to foreclosure a fifty nine thousand dollar tax lien and whose motion for a stay of the transfer of the deed was denied, contests the eighty eight thousand dollar legal fee awarded, asserting that these fees are unreasonable.¹ In response, plaintiff argues that the properly served defendant's failure to appear throughout the course of the proceedings bars his participation now and that in any event the fees are reasonably based upon the amount of effort expended to prosecute this litigation.²

It is well settled that the owner's right to redeem foreclosed property expires upon the sale of the property.   That sale can only be stayed by timely motion and by depositing money into Court in accordance with RPAPL 1341(2), which was not done here.  NYCTL 1996-1 Trust v. LFJ Realty Corp., 307 A.D.2d 957, 763 N.Y.S.2d 836 (2d Dept.2003)(Where the defendant “failed to make a payment into court and a motion to stay the sale of the property as required by RPAPL § 1341(2),” defendant's right to redemption expired upon the sale of the property).

The requirements of RPAPL § 1341, which are properly applied to a tax lien foreclosure proceeding, NYCTL 1998-1 Trust v. Rabinowitz, 7 A.D.3d 459, 777 N.Y.S.2d 483 (1st Dept.2004), are “ ‘mandatory in nature ․ [are not susceptible to] discretionary interpretation or application’,” and are not satisfied by an emergency order to stay the transfer of the deed.  Wells Fargo Home Mortgage Inc., v. Hiddekel Church of God, Inc., 1 Misc.3d 913(A), 2004 WL 258144 (Sup. Court, Kings Co.2004) citing Green Point Savings Bank v. Oppenheim, 237 A.D.2d 409, 410, 655 N.Y.S.2d 560 (2d Dept.1997).

However, it is equally well settled that in exercising its equitable powers, this Court has the discretion to set aside a judicial sale.  Guardian Loan Co. v. Early, 47 N.Y.2d 515, 419 N.Y.S.2d 56, 392 N.E.2d 1240 (1979).   There are a number of grounds upon which this can be premised including, mistake and fraud.

 This Court now holds that inflated legal fees in foreclosure proceedings will render the sale vulnerable to vacatur.   This is because applications for attorneys fees are made in many, if not most cases, after the default has occurred.   Excessively large legal fees could unreasonably inflate the amount owed upon the debt, preventing or severely limiting the owner's ability to stay the sale and redeem the property.  RPAPL 1341(2).   Therefore, a mechanism for contesting fee awards must be available even in the face of a default and even where, as here, the mandates of RPAPL § 1341 were not satisfied and the sale itself must be set aside.

This being said, we will now proceed to analyze the award of legal fees in a tax lien foreclosure proceeding.   Section 11-335 of the Administrative Code governs legal fees in a tax lien foreclosure proceeding and recites in pertinent part:  “A plaintiff in an action to foreclose a tax lien shall recover reasonable attorneys fees for maintaining such action.”   An action to foreclose a tax lien “is regulated by the provisions of the Civil Practice Laws and Rules and all by other provisions of law and rules of practice applicable [to real property foreclosure actions].”  Administrative Code § 11-335.

Therefore, in order to determine what constitutes “reasonable attorneys fees” we turn to the statutes and case law governing mortgage foreclosures.   In a mortgage foreclosure proceeding, there is no statutory allowance for attorneys fees-such fees must be contracted for.  Lincoln First Bank v. Thayer, 102 Misc.2d 451, 423 N.Y.S.2d 795 (Sup.Ct.1979).   Even when contracted for, policy rather than personal proclivity dictates the amount of the fee which scrutinized to insure that “the amount is reasonable and bears a fair relationship to the legal services necessarily incurred.”  Scheible v. Leinen, 67 Misc.2d 457, 324 N.Y.S.2d 197 (Sup. Ct., Monroe Co., 1971) See also, Kenneth Pregno Agency Ltd., v. Letterese, 112 A.D.2d 1032, 492 N.Y.S.2d 824 (2d Dept.1985). (There must be a showing that the fees bear a reasonable relationship to the unrecovered principal and the time and effort expended in the action).

Here, there is no mortgage memorializing an agreed upon fee.   All we have is a statutory pronouncement allowing “reasonable” attorneys fees.   While the plaintiffs lay claim to fees based upon the time they spent in the matter and the difficulty of the case, these factors must be balanced against the policy considerations attendant in a foreclosure proceeding which make paramount the interest of the owner in redeeming the property.   Accordingly, those aspects of a quantum meruit determination that consider the relationship of the fee to the unrecovered principal must weigh in heavily.  Ogletree, Deakins, Nash, Smoak & Stewart, P.C. v. Albany Steel Inc., 243 A.D.2d 877, 663 N.Y.S.2d 313 (3rd Dept.1997)

 This Court holds that where as here, the amount sought in fees represents more than one and one half times the amount of the tax lien, this factor, alone, warrants another look at the fee that was authorized.   This Court examined the facts underlying the fee request on a prior occasion, and finds that plaintiff's claim if decided only upon the nature and extent of the work performed is not unreasonable.   However, the broad public policy considerations that militate for keeping foreclosure costs low in order to give owners an opportunity to redeem their property or at the very least recoup some of their losses in a surplus money proceeding, mandate a drastic reduction in the fee awarded here which is so grossly disproportionate to the amount actually recovered in the underlying proceeding.

Moreover, this Court holds that where, as here, the costly litigation undertaken by the plaintiff was in response to defenses raised by an appearing co-defendant, who is at least potentially chargeable with having taken the risk of incurring additional costs, the defaulting defendant should not be so burdened.

In conclusion, based upon all of the prior proceedings had herein and submissions made therewith this Court holds that an award of $5,000 for attorneys fees is fair and reasonable.   Accordingly, the defendant's motion is granted to the extent that the judgment of foreclosure and sale is hereby amended, deleting the provision awarding attorneys fees in the sum of $88, 523.50 and inserting in its stead a provision awarding the sum of $5,000 in attorneys fees and amending the judgment amount accordingly.   To the extent that a sale was held in this matter, that sale is hereby set aside.

This constitutes the decision and order of the Court.

FOOTNOTES

1.   He also claimed that he had no knowledge of the application for these fees because he was not served.   At oral argument it appears that the claim of lack of service, which this Court rejects, devolved to a difference of one digit in the zip code and this Court finds that this insignificant deviation does not trigger the necessity of a traverse hearing.

2.   Plaintiff additionally asserts that most of these fees accrued in the course of the extensive litigation undertaken in opposition to a co-defendant's motion and appellate practice.   This litigation continued, they state, over a period of six years wherein they appeared in the Supreme Court and the Appellate division on ten occasions, filed twelve motions affirmations and briefs and conducted extensive research concerning the constitutionality of the Administrative Code, usury in tax lien law and the validity of the Notice of Pendency.   In previous submissions to this Court, the fees and charges were extensively detailed.

HERBERT KRAMER, J.